While the article is focused on retirement duration and shares a few facts about longevity, it opens the door for a conversation about the biggest financial risk to the retirement plan … an extended healthcare event.
While I do not agree with some portions of the article and that only two LTC funding were given – purchasing traditional long term care insurance and “self-insuring”, it provides several discussion points.
Today, I want to jump on the notion of “self-insuring”.
Frankly, I do not believe self-insuring is possible.
According to businessdictionary.com insurance is defined as a “Risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party … In general insurance, compensation is normally proportionate to the loss incurred…”
The key words here are risk transfer.
Now, let’s look at how investopedia.com defines self-insurance. “Self-insure is a risk management technique in which a company or individual sets aside a pool of money to be used to remedy an unexpected loss.” It goes on to say that “most people choose to purchase insurance against potentially large, infrequent losses”.
The key here is the act of “setting aside a pool of money”. Wouldn’t this be considered “self-funding”?
Afterall, the concept of setting aside a pool of money and retaining a portion of the risk in order to reduce the payment of premiums is “self-funding”. It is a risk management strategy often employed in the health insurance arena.
Simply, with a self-funded health insurance strategy generally there is a “stop-loss” mechanism (insurance) in place once a specific threshold is expended. With the “self-insurance / self-funding” LTC strategy, there is no “stop-loss” in place meaning that 100% of the funding of the cost from the beginning to the end of the incident comes from you.
How comfortable does that make you feel?
There are really 3 outcomes from the decision to accept the risk retention strategy and self-fund.
- There is no long term care need and the plan works flawlessly.
- There is a short duration long term care need that is easily absorbed.
- There is modest to significant long term care situation that consumes both the pool of money then the income generating capital base.
If you are in the first two groups, self-insuring / self-funding / risk retention might work for you. But, if your fall in the last group, an insurance based plan is a better way to go.
With asset-based long term care strategies, you can develop a plan that works on the principles of a self-funded plan with a “stop-loss” trigger or a pure transfer of risk or simply provide leverage by making distributions tax-free.
Simply, self-insurance to me does not exist and the self-funding/risk retention strategy is all risk. I’ll take an insurance-based strategy any day.
Next week – How to Self-fund