Everything is going great—until it isn’t. We focus on how long we think we’ll live and the amount of money we’ll need to fund it adequately. But what about the financial impact of a long life living with a disability? Medical advances and a better quality of life give us increased lifespans—the average for a Canadian woman is almost 84 years— yet, almost half of women over 65 report living with a disability.
Government programs only cover a small share of the cost of a nursing home or specialized in-home care. Costs for privately funded residential care vary but can be steep. According to The Canadian Life and Health Insurance Association (CLHIA), residential care costs range from $900 to over $5,000 per month. In-home care can range from $35,000 – $65,000 per year.
Enter long-Term Care Insurance (LTCI).
What is Long-Term Care Insurance?
Basically, this is insurance that pays you a recurring, specified amount should you become disabled. (In contrast, Disability Insurance protects against income loss and Critical Illness Insurance pays a predetermined lump sum should you have an illness covered by the policy.)
What does it cover and how is it paid?
Should you become unable to perform two of six “activities of daily living” on your own—eating, bathing, dressing, toileting, transferring or continence—you’ll receive a pre-arranged amount on a recurring basis, e.g. monthly. You’ll be able to choose either in-home or residential care and will not have to submit receipts to the insurer to receive payment.
The perception is that long-term care insurance is expensive, but this is not the case because of the high likelihood of it being paid out, says Toronto-based insurance advisor Robert Barkin. “A bigger issue is eligibility. Most people don’t consider it until their mid-50s or 60s; the older you get, the more expensive it is. Last year, while approximately 92% of life insurance applications were approved, only about 50% of long-term care applications were approved.”
What are the monthly premiums?
Like all forms of insurance, your monthly premiums are determined by age, duration of benefit, waiting period before receiving benefits, and any riders attached to the policy. For a $4,000 monthly benefit, the premium costs for a 45- and a 55-year-old woman would look like this: (Source: Desjardins Insurance)
Healthy, Female, Non-Smoker: $4,000/month Benefit (no riders)
Age 45: $163.44/month
Age 55: $292.64/month
Can the premiums change over the life of the policy?
Premiums are guaranteed for the first five years. After that, they can be changed at the discretion of the carrier based on claims experience for their entire book of long-term care insurance. They cannot be changed for a specific individual. This means that you could find your premiums going up (rarely do they go the other way).
Who should buy it?
Most plans are not available for purchase to individuals under the age of 40. Robert Storm, a Toronto-based insurance advisor says, “It should be of particular interest to single people with no dependents. They likely do not have the same need for life insurance and being sick or disabled alone without enough savings is a pretty scary prospect.”
Is it worth it?
One alternative is to create your own “long-term-care savings fund” with the money you would have put towards premiums. For example, if you saved $3,000 per year at age 55, assuming a pre-tax compound annual rate of return of 3%, by the time you were age 75, you’d have $86,029 in pre-tax savings.
To decide whether buying the insurance is worth it, consider that you may become disabled sooner and run through your savings faster than expected. Having a guaranteed insurance payout will slow down the depletion of your own funds. Then again, you have no control over premium increases and may end up paying more for the insurance coverage than you budgeted for.
Like all insurance products, you need to review your situation and decide whether having to pay out-of-pocket for most of your healthcare needs in the event you became disabled would be a financial catastrophe. If the answer is, “yes”, then consider getting insured for that extra financial buffer.