The LTC Self-Funding Trap

Even for affluent families, self-funding long-term care is the most undiversified, unhedged bet many investors will ever make.

In wealth management, risk is rarely ignored but often misunderstood. Few areas illustrate that better than long-term care.

Too many clients, and even some advisors, default to self-funding as the simplest path forward for long-term care risk, thinking “if care is needed, I’ll just pay for it.” On paper, it seems rational, especially for affluent families with strong balance sheets. In reality, it’s the most undiversified, unhedged bet many investors will ever make.

At its core, life insurance exists to pool risk. By self-funding potential long-term care, clients are doing the opposite by keeping all the risk for themselves. They’re exposing their portfolios to the widest possible range of outcomes: from no care at all to 20 years in a memory-care facility.

People don’t make this choice out of recklessness, but rather a lack of proper education. They see insurance as an unnecessary expense rather than a mathematical advantage. They forget that even though it comes with an upfront cost, risk pooling remains one of the best financial deals available to any wealth tier.

According to the U.S. Department of Health and Human Services, approximately 70% of adults age 65 and older will require some form of long-term care, whether it’s in-home support, assisted living or nursing care. The costs can add up, and without a plan, a single extended care event can diminish a family’s assets and disrupt their financial security.  

According to Vanguard, LTC costs can range from under $100,000 to over a quarter of a million dollars per year, with retirees in the top income quintiles expected to pay more out of pocket.

That’s why the real villain in LTC planning isn’t complexity, it’s complacency. And the antidote is proactive, diversified planning across the full continuum of care funding strategies.

The Cost of Saying “No Plan”

Self-insurance is a misnomer, as it really means “self-paying” — guaranteeing that any long-term-care expense comes directly from the client’s own portfolio. That means every dollar of market risk, inflation and longevity stays with them, and them alone.  

For instance, a 61-year-old setting aside about $10,500 per year for ten years would accumulate roughly $315,000 by age 85 if their investments averaged a 6% annual return – net of taxes, fees and expenses.

Yet projected care costs tell a different story. For example, take Raleigh, North Carolina, which is not in the top 20 metropolitan areas by LTC costs. Assuming a modest 3% annual inflation rate, in 25 years the estimated yearly costs will be about $160,000 for a home health aide, $225,000 for assisted living and $245,000 for a nursing home. Furthermore, the average duration for an LTC claim is approximately three years.

To keep pace with those rising costs, that same portfolio would need to earn nearly 10% a year after taxes and fees for more than two decades: an unrealistic benchmark for most retirees.

In contrast, a long-term-care insurance policy using the same outlay could generate a guaranteed, tax-free benefit pool approaching $750,000, indexed for inflation, while also providing a death benefit if care is never needed.

Paying out of pocket isn’t planning, it’s exposure.

Educating Clients on LTC Options

Advisors play a critical role in preparing clients for this risk, especially considering that 60% of advisors believe at least a quarter of their clients will need three or more years of LTC in retirement. Yet, one-third of clients say the reason they haven’t discussed long-term care is because their advisor never brought it up. This silence leaves clients underprepared for one of the most significant threats to their financial independence.

That communication gap highlights an even larger challenge: too often, long-term-care planning stops at awareness instead of advancing to strategy. True planning means modeling how different solutions perform across real-life aging scenarios.

This is because no two households experience aging the same way. A healthy couple in their fifties still accumulating wealth faces a completely different set of risks than a widowed retiree in her seventies looking to preserve assets and control care decisions. For advisors, the task is not to “pick a product,” but to model how each option performs across multiple care and longevity scenarios. This includes identifying where flexibility, guarantees and liquidity matter most.

To compare the options:

1. Self-funding offers autonomy but concentrates all financial risk on the household balance sheet. It relies on personal assets to cover care costs, leaving portfolios fully exposed for clients to face unlimited downside if care needs escalate.
2. Hybrid life insurance with long-term care benefits is a “two-in-one” option. It provides a death benefit to heirs while also allowing clients to use the policy for qualified long-term-care expenses if needed. Families choose it for its efficiency, leverage and peace of mind, knowing  that whether care is required or not, the policy will deliver value.
3. Traditional long-term-care insurance is a “pure protection” option. It is designed solely to cover qualified care costs, whether at home, in assisted living or in a nursing facility. Premiums are generally lower than hybrid solutions for the amount of coverage provided, but the policy only delivers value if care is needed. Clients choose it for its efficiency, focus and ability to create significant leverage against rising care expenses, but it does not provide a death benefit or legacy value if never used.
4. Life insurance with long-term care riders adds flexibility. Clients can access a portion of the death benefit to pay for qualified care expenses without liquidating investments or drawing down retirement assets. It bridges the gap between protection and liquidity, allowing clients to use benefits while living or pass them on if not needed.
5. Annuities with long-term care benefits convert existing assets into leveraged care funding. These annuities can be especially effective for clients with low-yield or non-qualified contracts, turning tax-deferred growth into enhanced coverage for care. This option provides predictable income, tax advantages, and an efficient way to repurpose idle capital for protection.

The value an advisor provides lies in the design of the plan. These product features are designed to align with a client’s goals. Understanding these tools is important for creating adequate coverage. By mastering them, advisors can develop truly customized solutions and confidently address the hesitations that prevent clients from acting.

Key riders to consider include:

1. Inflation Protection: This key rider ensures benefits keep pace with the rising costs of care, which can double every 20 years. Advisors can design policies with practical inflation options proportionate to local cost trajectories.
2. Return of Premium: This feature allows clients or their heirs to recover premiums if care isn’t needed, directly addressing the “use it or lose it” concern.
3. Premium Waivers: This rider suspends premium payments once a client is receiving benefits, alleviating financial pressure on the family during an already difficult time.

Once the mechanics are understood, the conversation must shift from options to outcomes.

Aligning Care Planning with Client Goals

Advisors create real value when they integrate care planning into the overall financial plan, matching strategy to client goals, not product to preference.

For example, each long-term-care approach behaves differently under market and health pressures. Traditional LTC insurance can still provide a desirable benefit per premium dollar, while hybrid and annuity-based solutions often suit clients who value repurposing existing assets.

“Advisors who stress-test scenarios for longevity, inflation and care settings turn an abstract ‘what if’ into a concrete, data-backed plan.”

The differentiator isn’t just which product an advisor recommends. It’s how effectively they model care costs and educate clients around the risks and benefits. Advisors who stress-test scenarios for longevity, inflation and care settings turn an abstract “what if” into a concrete, data-backed plan.

If there’s any doubt about the importance of this conversation, consider the long-term-care insurance declination form many advisors keep on file. It’s a document clients sign after reviewing their options and deciding not to purchase coverage. Essentially, they must acknowledge they understand the potential financial consequences. Advisors use it not as a formality, but as a safeguard: a record that the client made an informed decision about one of the most consequential events that can occur in retirement.

Long-term care is a pillar of retirement readiness and should be modeled with the same rigor as market volatility or tax exposure. It defines how people will live, not just how long their money lasts.

By Chad Druvenga, Rethinking65.com October 27, 2025

Don’t leave your care plan to chance!  Let’s stress-test your “self-funding” assumptions and explore smarter, leveraged solutions. 480-513-130.

Charles C. Scott AIF®, CDP®

ACCREDITED INVESTMENT FIDUCIARY®CERTIFIED DEMENTIA PRACTITIONER®

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