Table of Contents
- The Self-Insurance Temptation
- The True Cost of Long-Term Care
- The Opportunity Cost of Self-Insuring
- Tax Advantages of LTC Insurance
- Asset Protection Benefits
- When Self-Insuring Makes Sense
- When LTC Insurance Is the Better Choice
- The Hybrid Approach: Partial Self-Insurance with Insurance Transfer
- Making the Decision
- References
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LTC Insurance vs Self-Insuring Financial Comparison -- Hollowtree blog
The Self-Insurance Temptation
Families with substantial assets often question whether long-term care insurance is necessary. The logic seems sound: if you have $3 million, $5 million, or $10 million in investable assets, can you not simply pay for care out of pocket? This reasoning overlooks several critical factors that make the insurance vs. self-insurance decision more nuanced than a simple asset threshold test.
The core question is not whether you can afford to pay for long-term care. The question is whether paying for care out of pocket is the most efficient use of your assets, and whether self-insuring creates hidden risks that a transfer strategy (insurance) would eliminate.
The True Cost of Long-Term Care
Before comparing strategies, the scope of potential exposure must be quantified. According to Genworth's 2024 Cost of Care Survey, median annual costs for long-term care services in the United States are approximately $64,200 for home health aide services (44 hours per week), $62,400 for assisted living facility care, and $108,405 for a semi-private nursing home room.
These are national medians. In high-cost metropolitan areas like New York City, San Francisco, Boston, and Washington D.C., costs can be 50% to 100% higher. A private room in a premium facility in these markets can exceed $200,000 annually.
With long-term care inflation averaging 3% to 5% annually and care potentially needed 20 to 30 years from now, future costs must be projected. A $110,000 annual nursing home cost today, growing at 4% annually, becomes approximately $240,000 per year in 20 years and $365,000 per year in 30 years.
A five-year care event at these future costs could total $1.2 million to $1.8 million. For a couple where both spouses need care, the total exposure could reach $2.4 million to $3.6 million. These numbers are large enough to significantly impact even multi-million-dollar portfolios.
The Opportunity Cost of Self-Insuring
Self-insuring means earmarking assets for potential long-term care costs. Whether those assets are formally segregated or simply part of the general portfolio, they represent capital that could otherwise be invested for growth, used for retirement income, gifted to heirs, or donated to charity.
Consider a family that earmarks $1 million at age 55 for potential LTC costs. If that $1 million were instead invested at a 7% average annual return, it would grow to approximately $3.87 million by age 75. If the family purchases LTC insurance with a $6,000 annual premium and invests the remaining $994,000, the net portfolio value at age 75 would be approximately $3.74 million (investment growth minus $120,000 in cumulative premiums). The difference is modest, but the insured family has transferred the entire long-term care risk to the insurance carrier.
The comparison shifts dramatically if care is needed. The self-insured family spending $200,000 per year on care depletes the earmarked funds rapidly and then must draw from other portfolio assets. The insured family receives tax-free benefits that cover care costs while their portfolio continues to compound. The choice of benefit period duration becomes critical in managing this risk.
Over a five-year care event costing $1 million, the self-insured family's portfolio is reduced by $1 million plus the lost investment returns on that capital. The insured family's portfolio is reduced only by the cumulative premiums paid, with the insurance carrier funding the care costs.
Tax Advantages of LTC Insurance
LTC insurance provides several tax advantages that improve the comparison versus self-insuring. Premiums for tax-qualified LTC policies are deductible as medical expenses subject to age-based limits under IRC Section 213(d). For 2025, the maximum deductible premiums range from $480 for individuals age 40 and under to $7,350 for individuals over age 70.
Benefits received under a tax-qualified LTC policy are generally excluded from gross income under IRC Section 7702B. In 2025, the per diem exclusion is $420 per day ($153,300 annually). This means LTC insurance benefits are received tax-free, while self-funded care expenses are paid with after-tax dollars.
For high-income families in the 37% federal tax bracket, the after-tax cost of self-funded care is significantly higher than the stated cost. Paying $200,000 for care with after-tax dollars requires approximately $317,000 in pre-tax income. Insurance benefits covering the same care cost nothing in taxes.
Additionally, the Pension Protection Act of 2006 allows tax-free exchanges of annuities and life insurance policies for hybrid LTC products under IRC Section 1035. This creates a pathway for repositioning low-yielding assets into tax-advantaged LTC coverage without triggering capital gains.
Asset Protection Benefits
In the 43 states participating in the Long-Term Care Partnership Program, qualified LTC policies provide additional asset protection in the event the policyholder eventually requires Medicaid. For every dollar the LTC policy pays in benefits, an equal amount of assets is protected from Medicaid spend-down requirements.
While high-net-worth families may consider Medicaid irrelevant to their planning, multi-year care events can deplete substantial portfolios. Partnership protection provides a backstop that ensures some assets are preserved regardless of how long care lasts.
Self-insuring provides no comparable asset protection. Every dollar spent on care directly reduces the estate, with no mechanism for preserving assets from spend-down.
When Self-Insuring Makes Sense
Self-insuring is most appropriate for families with liquid assets exceeding $5 million to $10 million, where even a worst-case care scenario would not materially affect lifestyle or legacy goals. At these asset levels, the probability-weighted expected cost of care represents a manageable percentage of total wealth.
Self-insuring also makes sense when health conditions prevent obtaining LTC insurance at standard rates. If underwriting results in a significantly rated premium or declination, the cost-benefit comparison shifts toward self-insuring or alternative strategies like hybrid products with simplified underwriting.
Families who strongly prefer investment control and have a demonstrated ability to achieve strong investment returns may rationally choose self-insurance, accepting that the expected value of premiums paid versus benefits received favors the insurance company (as it must for the insurer to remain solvent).
When LTC Insurance Is the Better Choice
LTC insurance is the better choice for families with $1 million to $5 million in investable assets, where a significant care event would compromise retirement security or legacy goals. Insurance efficiently transfers the catastrophic tail risk of a multi-year care event at a known, manageable annual cost.
Families with strong family history of Alzheimer's disease, Parkinson's disease, or other conditions associated with extended care needs should strongly consider insurance regardless of asset level. The probability-weighted analysis shifts significantly when family history suggests above-average likelihood of needing care. Additionally, Medicaid planning adds another dimension to the LTC vs self-insuring decision, particularly for couples where strategic use of long-term care insurance can preserve assets that might otherwise be consumed by care costs.
Couples should especially consider insurance because the probability of at least one spouse needing care is much higher than for either individual alone, spousal impoverishment is a genuine risk when one partner's care depletes joint assets, and shared care riders allow couples to pool benefits efficiently.
The Hybrid Approach: Partial Self-Insurance with Insurance Transfer
The most sophisticated planning often combines partial self-insurance with insurance transfer. A family with $4 million in assets might purchase an LTC policy with a $250 daily benefit and a 3-year benefit period, while planning to self-fund the 90-day elimination period and any costs exceeding the benefit period.
This approach captures the leverage benefits of insurance (paying $5,000 per year in premiums for $270,000 or more in potential benefits) while accepting a manageable level of self-insured risk. The total premium cost is lower than a fully comprehensive policy, and the family retains flexibility in how they fund the self-insured portion.
Hybrid life/LTC policies offer another blended approach. A single premium deposit of $200,000 to $500,000 creates a policy that provides death benefits if care is never needed, LTC benefits at a 3:1 to 5:1 leverage ratio if care is needed, and a return-of-premium guarantee if the policy is surrendered. This structure eliminates the "use it or lose it" concern that deters some wealthy families from traditional LTC insurance.
Making the Decision
The decision framework should consider total household assets and their liquidity, current and projected annual income, family health history and longevity patterns, desired legacy and charitable giving goals, risk tolerance and preference for certainty versus flexibility, and tax planning opportunities.
Work with a financial advisor and an independent insurance specialist who can model the specific scenarios for your family's situation. The analysis should include best-case (no care needed), expected-case (average care duration), and worst-case (extended care event) projections under both self-insurance and insurance strategies. The numbers typically show that for families between $1 million and $5 million in assets, LTC insurance provides meaningful financial protection at a reasonable cost. Contact Hollowtree for a personalized comparison based on your family's situation.
References
Written by
Cofounder Hollowtree Solutions & Marketplace. Executive MBA from Columbia Business School and London Business School, former attorney. Entrepreneur, investor, adviser.