Should Business Owners and Executives Self-Fund Their Long-Term Care Needs?

Should Business Owners and Executives Self-Fund Their Long-Term Care Needs?

Long-term care is essential for many executives and business owners as they plan for their future. 

Long-term care is a critical issue that can impact your financial stability and the legacy you leave behind. As an executive or business owner, you have worked hard to build wealth and secure your future. 

With the costs of long-term care rising every year, it is essential to consider how you will fund it when the time comes. 

One option is to self-fund long-term care, which means paying for it out of your own pocket instead of relying on insurance or government programs. Many executives and business owners choose this option because they have the means to do it or they think they do. But is it the right option for you? 

In this post, we will explore the risks of not planning for long-term care and the advantages and disadvantages of self-funding for executives and business owners.

What are the risks of not planning for long-term care?

The risks of not planning for long-term care can be significant.

70% of people aged 65 will need long-term care at some point, and the majority of those individuals will require paid services. Women typically need 4-5 years of long-term care, and men need 3-4 years. Many assume that their health insurance or Medicare will cover their long-term care needs, but this is not true.

Without proper planning, individuals and their families may be left scrambling to find suitable care options, which can be expensive and emotionally draining. Moreover, without a comprehensive funding strategy for long-term care in the U.S., individuals may have to rely on their personal savings or family resources to pay for care, potentially leading to financial strain and jeopardizing their financial security. 

What happens if a business owner doesn’t plan for long-term care?

The risk to a business owner of having to sell their business share or assets to fund their long-term care can be significant. It could result in losing control over the business, a lower sale price due to the urgency of the sale, and the possibility of a significant tax burden.

Additionally, if the business is the primary source of income for the owner, the loss of that income could have a ripple effect on their personal finances and the financial stability of their family. Therefore, business owners need to plan for their long-term care needs early on and consider options such as insurance or other financial planning strategies to mitigate this risk.

What happens if an executive doesn’t plan for long-term care?

An executive who needs to sell assets to pay for long-term care can face significant risks. Selling assets like real estate or investments can disrupt financial plans and goals. In some cases, it may also result in a loss of income or reduced retirement savings. Additionally, selling assets at an unfavorable time, such as during a market downturn, can lead to significant losses.

Therefore, it is crucial to consider long-term care planning as a part of overall financial planning to ensure that you and your loved ones are prepared for future care needs.

What are the costs of long-term care?

Long-term care costs are expensive, and Americans are concerned. According to a recent study by LIMRA, that worry has grown from 12% in 2019 to 37% in 2021.

Recent statistics about long-term care:

• 69% of individuals needed some type of long-term care
• 59% received unpaid home care
• 26% is the average annual proportion of annual caregiver income directly spent on care (doesn’t include indirect costs)
• 42% received paid home care. Average cost of a home health aide: $61,776
• 35% were in a nursing facility. Average cost of a private room: $108,405/year
• 13% were in an assisted living facility. Average cost: $54,000/ year

Sources: Data: Administration for Community Living, “How Much Care Will You Need?,” LongTermCare.gov, last updated Feb. 18, 2020; AARP, Caregiving Out-of-Pocket Costs Study (AARP, June 2021); and Genworth, “Costs of Care Trends and Insights,” Feb. 7, 2022.

Genworth estimates that by 2031, a home health aide could cost $83,000 and a private room in a nursing home is expected to be $145,700 per year.

While humans have made great strides in extending life expectancy, with some researchers predicting that we may increase life spans by a decade within the next decade, it’s important to remember that the quality of life in those extra years is just as important as the number of years.

The future is unpredictable, and paying for a “use it or lose it” insurance policy can seem like a wasted spend for many. As a result, some individuals with the financial means may choose to self-fund their future care instead of paying premiums. 

What does self-funding long-term care mean?

Self-funding is when long-term care expenses are covered by distributions from financial assets such as investments and real estate. The individual and their household will bear the brunt of the expenses.

What are the pros and cons for business owners and executives to self-fund their long-term care?

The Pros of Self-Funding Long-Term Care 

Self-funding long-term care has its advantages, which are worth considering when deciding.

Some of the pros include:

1. Save you money: If you have no need for long-term care, then the costs of self-funding have been zero to you. You have not paid any premiums for long-term care insurance, which can add up and possibly increase over time.
2. Flexibility: Self-funding long-term care gives you more flexibility and control over the type of care you receive and where you receive it. You can choose the care provider and customize your care plan to meet your needs.
3. Asset protection: If you self-fund long-term care, you can protect your assets from being spent down to qualify for Medicaid. This can be particularly important if you have a high net worth or own a business.

The Cons of Self-Funding Long-Term Care

While self-funding long-term care has its advantages, there are also some cons to consider:

1. High costs: Long-term care can be expensive, and self-funding it can quickly deplete your savings or retirement funds. If you end up needing long-term care for an extended period, it could become a significant financial burden and impact the rest of your family. 
2. Risk: You may need long-term care for an extended period and may not have enough money to pay for it. This could leave you with limited options for care, and you may have to rely on Medicaid or other government programs.
3. Uncertainty: It can be challenging to predict how much long-term care you may need and for how long. Planning for long-term care costs can be challenging without a clear understanding of your needs.
4. Reliance on family or friends: If you plan to rely on family or friends taking care of you, there could potentially be some opportunity costs that tend to be forgotten. Women are predominantly the main caregivers in a family, and their financial sacrifice may erode their financial security as they age.

Alternatives to Self-Funding Long-Term Care

If you decide that self-funding long-term care is not the right option for you, there are alternatives to consider:

• Long-term care insurance: Long-term care insurance can provide coverage for the costs of long-term care, but it comes with premiums and potential rate increases. It may also have coverage limitations and exclusions.
• Hybrid insurance: Hybrid insurance policies combine long-term care insurance with other types of insurance, such as life insurance. They provide long-term care coverage if there is a need or a death benefit if the policy isnt’s used to pay for care. 
• Medicaid: Medicaid is a government program that provides coverage for long-term care for those who qualify based on income and asset limits. However, it can be challenging to qualify for Medicaid, and there may be limitations on the type of care you can receive.

So Should Business Owners and Executives Self-Fund Their Long-Term Care Needs?

As executives and business owners plan for long-term care, there are three important questions to ask yourself.

1. Are you planning for yourself or you and your spouse? If one spouse requires care for a long period, it could potentially leave the other spouse with limited funds for the future.
2. Where do you want to receive your care? While most people prefer to stay at home, it could be more expensive if you require care around the clock. Do you want to stay at home no matter the cost?
3. Are you comfortable with spending down your assets? Do you want to leave a legacy or provide for your children?

Answering these questions can help you develop a comprehensive long-term care plan that addresses your unique needs and preferences and decide whether self-funding is right for you.

Long-term care costs are already painfully high and will only worsen as we have an aging population and a scarcity of caregivers.

Self-funding long-term care is a significant decision for executives and business owners to make. While it offers flexibility and asset protection, it also comes with high costs and risks.

It’s essential to consider all your options and work with a fiduciary financial advisor to help you assess your self-funding options in a tax-efficient manner or your other options to make an informed decision that meets your needs and financial goals.