Should Federal Employees Self-Insure for Future Long-Term Care?

Federal Employees and Future Long-Term Care – Part III: Should Federal Employees Self-Insure for Future Long-Term Care?

< Part Two

Edward A. Zurndorfer

This is the third of three FEDZONE discussing federal employees and long-term care (LTC). Most federal employees who reach age 65 will have a need for future LTC, most likely by the time they reach their early 80’s. The question is how employees will pay for potential future LTC expenses. The first FEDZONE column in this series discussed what LTC is and options to pay for it. The second FEDZONE column discussed long-term care insurance and in particular the Federal Long Term Care Insurance Program (FLTIP) as a way for paying future LTC expenses. This column presents “self-insuring” as a viable way to pay future LTC expenses. Among the issues presented are the advantages and disadvantages of self-insuring, who is a suitable candidate to self-insure, the steps involved in self-insuring for paying future LTC expenses, and the risks involved in self-insuring for paying for paying future LTC expenses.

Advantages and Disadvantages of Self-Insuring to Pay Future LTC Expenses

            Among the advantages associated with self-insuring in order to pay future LTC expenses: (1) The freedom to choose the type of setting in which the LTC will be performed (nursing home, assisted living, home health care) without having to get the approval from an insurance company from which a long term care insurance policy was purchased and a claim must be submitted in order to get reimbursed for any qualified LTC expenses  incurred; and (2) If a self-insured individual dies before ever having a need for LTC or before all saved funds are used to pay for LTC, the funds saved can be bequeathed to family members. The biggest disadvantage of self-insuring is that it takes a certain amount of discipline and financial sophistication to accumulate the amount of funds needed to pay future LTC expenses.

Estimating the Cost of Future Long-Term Care

Before an individual can embark on a program to self-insure in order to pay future LTC expenses, it is important for the individual to have an awareness of the current cost of LTC services and projected future costs.

LTC services are expensive which makes it even more important to plan ahead. The following chart is a summary of national 2020 LTC costs based on Genworth Insurance Company’s cost of care survey:

2020 Annual Cost of Long-Term Care Services*

The average period during which an American system aged 65 years will need long-term care is two years. This means that for those individuals who needed private nursing home care in a private room during 2020 the cost of LTC was $211,700 ($105,850 times 2). By the year 2030, the same private nursing home room two-year stay is projected to cost nearly $300,000.

What are the Steps for Self-Insuring for LTC?

Not every individual is financially capable and fiscally prepared for self-insuring when it comes to self-insuring to pay future LTC expenses. The following are some considerations and steps for individuals take in order to determine whether “self-insuring” will be a viable option for them in order to pay for future LTC expenses

Step 1. Understand and grasp the risk of needing LTC in the future. The purpose for buying any type of insurance is to guard against the “unpredictable.” It is important for an individual who wants to self-insure with respect to paying future LTC expenses to understand the risk of not having the means for paying for LTC should that happen.

Step 2. Make a reasonable estimate of the future cost of LTC. The estimate will depend in part on:

(1) Whether “institutional” (nursing and assisted living) care versus “non-institutional” (home health care) care will be needed; (2) How far in the future an individual is expected to need LTC); and (3) Where the individual will likely be living (more expensive area of the country or world versus a less expensive area of the country or world) at the time the individual will need LTC.   

Step 3. Factor Into account other family members. Once an individual understands the risk of needing LTC in the future and has a grasp of the future LTC expense, it is important for the individual to factor in other family members – spouses, children – when deciding whether or not one should self-insure for future LTC. The individual should ask himself or herself: If I have a spouse or other close family member who depends on me for financial support, then the potential financial implication of self-insuring will multiply in the sense that if I use all financial sources available to pay for LTC, how will that affect dependent family members who need some or all of these financial sources?

Step 4. Consider “worst case” scenarios. The average duration of LTC for most individuals is two years. Most individuals make cost projections based on this average. But a percentage of Americans who enter nursing home will stay for much longer. For example, 10 percent of nursing home occupants will stay for five or more years. Using 2020 numbers as illustrated above in Genworth Company’s 2020 Cost of LTC Cost Survey, the total cost of a five-year nursing home stay would add up to $529,250 ($105,850 per year times five years). It is therefore important for individuals to consider an extended duration of LTC and evaluate if one is able to save the amount needed to pay for future LTC expenses in the event of an extended stay..

Step 6. Determine if the TSP and/or IRAs can help in the process of setting aside enough money to pay for future LTC expenses. For some federal employees who have a sufficient amount of money saved in the TSP and/or IRAs, setting aside a portion of their TSP and IRA assets can be a boost for paying future LTC expenses.

Step 7. Separate one’s “LTC savings fund” from other financial assets. Those individuals who decide that self-insuring by establishing and contributing to an “LTC savings fund” is the best way to pay future LTC expenses, the individual should separate the LTC fund from the individual’s other non-retirement and retirement accounts. In particular, a specific savings fund that is solely dedicated to pay potential LTC expenses. This account is dedicated therefore as a resource to protect one from LTC-related financial chaos. If it turns out that one does not need LTC for one reason or another, the “LTC savings fund” can be used to pay other or passed onto family members at the individual’s death.

Risks Associated with Self-Insuring for LTC

While self-insuring is a viable option for those individuals who have sufficient financial resources to do it, mistakes are possible. It is important to discuss what individuals who want to self-insure to beware of some of the risks associated with self-insuring:

• Making misleading assumptions. Faulty assumptions can lead to disastrous consequences. For example, assuming that since one has more than $1 million in financial assets and that one therefore is able to self-insure is not a realistic assumption.

• Impact on legacy plan. Many individuals with a high net worth (say more than $2 million) likely have a legacy plan that determines where their money goes after they die. For those individuals who choose to self-insure using some of their financial assets, it is important to evaluate how self-insuring for future LTC expenses may negatively impact their legacy plan.

• Neglecting care coordination. Even if an individual has the financial resources and ability to self-insure for future LTC expenses, there are still several parts to a LTC plan that need to be accounted for. There may be informal caregiving expenses involved. An adult child may need to coordinate or help with care, possible disrupting their earnings and income.

• Timing and investment liquidity. The 2008-2009 “great recession” and associated financial crisis taught Americans some hard lessons on financial planning and in particular how to save and how to invest for the future. External influences including systematic failures, high-risk investments, and regulatory failures can result in a full-blown economic downturn, high-inflation and perhaps a recession. If one needs to pay for LTC at a time when the economy is suffering, think of the possible financial consequences. One’s income may be severely reduced, and one may be forced to sell financial assets that are available when the stock and bond markets are at a low point.

Long-Term Care

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.