Are you going to be able to pay for the care you may need one day?
By Olev Edur
Longer lifespans mean that a typical retirement now lasts decades rather than years. That’s great news, but the downside is that some of those years will likely be spent in less-than-perfect health. And that might mean big expenses, especially if you have to move into an assisted-care residence or nursing home for any length of time.
Those fortunate enough to be able to count on in-home care from family members may be able to avoid most of those hefty bills. Government and volunteer home-care programs can pick up some of the slack. But there often comes a point at which the care someone needs can no longer be handled by family members and visiting nurses.
Given our increasingly mobile society, family-provided care is less often available than it might have been. “Most caregivers are women who look after their children, their parents, their in-laws, and lastly their spouses,” says David Engel, a broker specializing in living-benefits insurance at Braley Winton Financial Group in Montreal. “By the time the caregivers require care, the children have moved away. My own children don’t live in the same city as I do, and there are many others in this same situation.”
In addition, Engel says, “One thing not mentioned very often is the toll—financial and psychological—that caregiving can take on the caregiver. Looking after someone can be a long and thankless task.”
As a result of these realities, most people will at some point have to consider a retirement facility with the appropriate health care resources. Depending on what’s required and for how long, those facilities and resources can get very expensive.
According to instant-life-insurance.net, an online insurance brokerage, the out-of-pocket costs in Canada for a long-term stay at a government-subsidized nursing home can be as high as $2,161.71 a month. The average cost for a room in a privately owned retirement residence ranges from $1,527 to $4,774 a month for a semi-private room and from $1,600 to $7,750 for a private room. And those bills may go on for many years, easily running to six digits.
“The costs of accommodation can vary from $2,000 to $7,000 a month, depending on the services desired or required,” Engel confirms. “My own family went through about $750,000 over a 12-year period. I have a client who has already spent about $1.2 million on her husband. She doesn’t have much left, and that doesn’t take into account her own needs.
“Unfortunately, there’s a mindset in Canada that the government will provide for all our health care needs,” Engel adds. “In fact, the government provides only curative care and has made it very clear that it will not pay for maintenance care. And while there are government-run facilities, you’ll have to assign your pension income to them, and there’s a payment test of what you can afford.
“The main and most expensive cost is for an outside care person,” Engel says. “This cost can add significantly to the monthly cost.
“It’s all about risk management,” Engel says. “One in two Canadians will require assisted living or help at home at one time or another. The average length of time that this care is required is about 4.5 years, but we hear stories of people living for another 10 or 15 years, especially with Alzheimer’s.”
So how do retirees guard against this risk? Long-term-care (LTC) insurance.
Regular disability insurance is designed to compensate for lost wages, but these policies generally terminate at age 65, so they’re of no use to retirees. Critical illness insurance is designed to protect young families should the breadwinner suffer certain catastrophic events, such as heart attack, stroke, life-threatening cancer, and bypass surgery, leaving him or her unable to provide for the family.
Long-term-care (LTC) insurance is designed specifically to help cover the potentially high costs of adverse health-related developments in retirement.
“Long-term-care is like disability insurance for seniors—that’s basically what it is,” Engel says, adding that Canada has been one of the last major countries to adopt it. “This type of insurance was available almost everywhere before it was introduced here 20-plus years ago.”
The Nuts and Bolts
Basically, LTC insurance provides the monthly benefit amount you’ve chosen, should you become unable to perform any two of six daily living functions (eating, washing, using the bathroom, dressing, transferring from one chair to another or to bed, and maintaining continence) or you develop a cognitive impairment such as Alzheimer’s.
The payments begin after an agreed-upon waiting period and continue for an agreed-upon term (including your lifetime); the payments can also be indexed to inflation. The money can be used in any way you see fit—for meal preparation, therapy, cleaning and laundry, nursing care, etc.. It can be used at home or in a facility, although some policies provide increased benefits for facility care.
To qualify, you have to complete an insurability disclosure form and may need to undergo a telephone examination to ensure your mental presence. While pre-existing conditions might indicate a shorter lifespan and so a shorter payout period, in most cases, they will lead to an increased likelihood of payouts, starting sooner and perhaps lasting longer than the norm.
As for costs, this insurance is not inexpensive, although it’s considerably more economical to buy it in your 50s rather than your 60s or later. Engel provided Good Times with a sample policy for a 65-year-old male (policies for females are more expensive) that would pay $3,000 a month with a 90-day waiting period and 3 per cent annual inflation: it would initially cost about $320 a month; if begun at age 60, this same policy would initially cost $235; and if started at age 55, it would be $171.
After five years, your premiums may be increased, although Engel says such premium increases aren’t a regular occurrence. “The rates changed about two years ago for all companies after a long period of stable level premiums with no changes,” he says. “The increase at that time was about 15 per cent.”
While 15 per cent is a sizable increase, even after several years, Engel notes there was a dearth of experience with LTC claims in Canada until recently, given the product’s newness here, so suppliers had to rely on US statistics.
While LTC seems expensive at the outset, Engel points out that it’s inexpensive when you compare the premiums to the costs that otherwise may be incurred later on. Using the policy described earlier as an example, after 15 years you would have paid about $58,000, but then if you needed care at age 80 for another 15 years, the benefits would amount to almost $670,000. If you needed care from age 75 onward, you would have paid about $38,000 but could receive $730,000 in benefits over the course of 20 years. Viewed another way, you would need to receive benefits for only 13 months (beginning at age 75) or 19 months (age 80) to recoup all your premiums.
Of course, as Engel points out, the average length of time that care is required is 4.5 years, a lot less than 15 or 20 years. But that’s the average: half of us will require longer periods of care.
Here’s one feature of potential value for your estate: if you should be fortunate enough never to need to claim all your benefits, most policies can provide for the return of all your premiums, less whatever benefits have been received. This feature, however, costs extra.
Reducing the Cost of Coverage
The bottom line is that LTC insurance isn’t cheap.
“This isn’t insurance for people who are making $40,000 or $50,000 a year,” Engel admits. “But you don’t need to cover all the expected costs, because anything would help to make life easier. In the case of my own family, if we had had even $1,000 a month coming in to help with the costs, it would have removed a big strain.”
There are several ways to reduce costs, in addition to buying early. If, for example, you opt for a $1,000 monthly benefit rather than $3,000, the premiums would be reduced to around a third of those cited above (assuming the same policy). And reducing or eliminating the inflation factor can have a large impact, as can reducing the benefit period.
Finally, in terms of security, all LTC policies are covered by Assuris, an insurance industry guarantor that functions in the same way as does the Canada Deposit Insurance Corporation (CDIC), which guarantees bank and trust company deposits against insurer failure through mandatory contributions from members. If your carrier fails, your LTC policy will be transferred to a solvent company and Assuris guarantees you will retain up to the higher of $2,000 a month or 85 per cent of the promised monthly income benefit.
Ultimately, the decision to buy this form of insurance is going to depend on your financial and family circumstances, as well as on your long-term health prospects.
If, however, you have concerns about your care as you move onward in retirement, you should give some thought to paying yourself forward, so to speak.
LTC policies can be purchased for as little as $125 a month, depending on how little coverage you can accept—remember that, as Engel suggests, every little bit of added income will help if and when it comes time. But if you want to get the best fit for your circumstances, then given how many variables are involved, you should consult a broker well versed in LTC insurance.