Will you have enough money to
cover your health care costs when you’re older?
Are
you worried that you may not have family or friends who could properly take care
of you as you age? Do you wonder if your nest egg will cover the long-term care
costs?
Many
Canadians expect that the government will cover health care costs when they get
older. Yet the reality is very different.
When
it comes to government-subsidized home care or long-term care, only some basic
care is covered by a patchwork of provincial services, leaving a good portion
of long-term care costs to be paid by you. And these costs are on the
rise, as the list of approved health care expenses gets shorter every year.
You
may want to follow the lead of Mary and Sonil. This couple wants to live in their
three-story Toronto house until they can’t handle the upkeep, or a decline in
their health means they can’t deal with stairs and need help with personal
care.
They
don’t have kids to care for them in their old age, and they are concerned about
the health problems running in both of their families that may manifest
themselves later. So when they were 65 and still in decent health, Mary and
Sonil gave themselves peace of mind by buying long-term care insurance. Their financial advisor explained that
it’s better to buy this insurance before it’s needed, since it can be hard to
get once health problems start occurring.
Their
insurance will start to pay benefits if they need help with any two of these
five everyday personal care activities:
·
bathing
·
dressing
·
eating
·
toileting
(due to incontinence or mobility problems)
·
getting
out of bed; transferring from bed/toilet to wheelchair
When
Mary and Sonil turned 75 they both were in fairly good health, but they didn’t
have as much strength or energy as they once had. They were tired of shoveling
snow, and gardening had become a literal pain in the neck. Their 80-year-old
house needed more and more repairs, which was also cutting into their savings.
Some
of their friends had moved into an attractive local retirement home and were
loving it, so they decided to explore this option for themselves.
It would
cost them $7,000 a month ($3,500 each) for a nice room, 3 meals a day served in
a dining room, having access an on-site nurse, and a wide variety of daily activities
and day trips to keep them active and engaged. Their costs would be about $84,000
a year, not including their telephone bill, and other purchases including
clothing.
They shopped
around and discovered that some retirement homes charged as little as $1,500 per
person per month, but those had fewer activities and the food was more
institutional. And they were shocked to learn that there are homes that cost upwards
of $6,000 per person a month!
They
costed out hiring home care, and learned that charges range from $15 to $75 an
hour. They knew that if they started needing more help, that would add up fast
and negotiating the stairs would still be a problem.
They
quickly realized that their government pensions and dwindling after-tax savings
wouldn’t cover their costs. However, the sale of their home would free up about
$600,000, which would certainly help.
Their
advisor presented them with some options. If they invested all their money in
safe investments like Guaranteed Investment Certificates (GICs), they’d only
earn about 2% a year. The money from the sale of their home would run out in
about 7-1/2 years if they moved into a retirement home. This would get them
into their early eighties but then what? They may live into their nineties, or
even top 100!
Placing
savings in riskier investments such as mutual funds could bring higher rates of
return, but could also potentially lose value from year to year, leading to an
even swifter evaporation of their funds.
Putting this risk into perspective, their advisor
pointed out that if their savings drop by 25% in one year, they would need to earn
33% on their money the next year to make up the difference. If their
investments dropped by 50%, they’d need to make 100% to make up the difference!
Their savings would shrink even faster, because they would have to keep drawing
up on the remaining funds to cover their expenses. Mary and Sonil agreed that
this type of investment strategy was too risky.
Instead,
they decided to purchase of a joint annuity with some of the proceeds from the
sale of their house. It started providing them with an income that was contractually
guaranteed and almost tax-free, which they would receive for the rest of their
lives, even if they outlived the funds originally invested in the annuity. This
provided them with a lot of comfort. Their second safety net was their
long-term care insurance.
Mary
and Sonil confidently moved into their first choice of retirement residence,
and surrounded by friends, good food and a wide variety of activities, they
knew that they had made a good choice, and could sleep well, knowing they could
cover their costs and live in dignity, no matter if they needed more help or how
long they lived.
Is long-term care insurance right
for you?
Long-term
care insurance is often for people who prefer to know that their financial
health care costs will be covered for life.
It can also be for people who are passionate about leaving behind money
to support friends, family and their favourite charities after they die because
the thought of spending down their entire estate during their lifetime makes
them uncomfortable.
Because
the benefits paid from long-term care insurance can be indexed to inflation, everyone
can find comfort in this insurance product.
Knowing
that long-term health costs are taken care of also allows people to explore
advanced tax-smart and creative ways to redirect some estate assets away from
the taxman, but that’s a story for another blog, or a conversation you could
have with your financial advisor.
What does long-term care
insurance cost?
The
cost of long-term care insurance varies with such things as your age (the
younger you are, the lower the cost); health; what size of monthly payment you
choose; and if you choose extras like inflation protection or lifetime coverage
vs. payments over a fixed number of years.
In
addition, insurance costs can vary depending on your health; family medical history;
and your desire to leave a legacy for the people and causes you are passionate
about, or simply your desire not spend down all your assets during your life
just in case you need funds for a special reason.
To
give you an idea of cost, Mary and Sonil, a healthy 65-year-old couple, paid
this for their shared long-term care insurance plan:
Annual
insurance premium:
$4,594.56/year
($382.88/month)
The
benefits they’ll with this plan receive will be: $1,500/month ($18,000/year)
indexed to inflation.
At age
80, Sonil had a serious fall. He now needs a wheelchair to get around, and
requires much more intensive daily care. Sonil and Mary made the hard decision
to move Sonil into a long-term care home. They were no longer required to pay
premiums eligible on their long-term care policy, and started collecting
benefits, which had risen to $2,019/month ($24,228/year).
In
total, over the 15 years of contributing to their policy, they have paid $68,919.
If they
had put this money into safe investments like GICs, the 2% a year in earnings would
have resulted in a total savings of about $86,385 by age 80.
Although
that might sound like a lot, Sonil’s payments on his private room are $2,439/month ($29,268/year). If Sonil was
using these savings alone to pay his long-term care costs, he would run out of
money in less than three years. As it is, between the money he receives from
his pensions, his long-term care insurance, and a top-up from their annuity
payments, Sonil and Mary don’t have to worry about covering Sonil’s health care
costs or other living expenses.
Keep in mind that at age 80, the
probability is quite high that the average person could benefit from long-term
care insurance for five years or more. It’s clear that In the case of Mary and
Sonil, their policy would more than pay for itself.
Are you worried that long-term
care costs may be out of reach when you need the care?
Here
are a few solutions to covering long-term care costs:
1.
Buy
long-term care insurance.
2.
If
it makes sense, delay a move to a retirement home.
3.
If
you need help taking care of your home, you can hire people to clean, shovel
snow, do your gardening and cut your grass.
4.
If
you need health care support, contact your local Community Care Access Centre.
You may be eligible for a few hours of government-supported care a week.
5. Because interest rates are
currently very low, it may be advantageous to put some of your savings into a
life annuity or similar guaranteed solutions for some or all of these reasons:
i) Annuity income will be much higher than most other sources of guaranteed income
today.
ii) Life annuities generate a guaranteed income for life, even if you outlive
your initial investment.
iii) Increasing your income in this way can help pay for affordable individual
or shared long-term care insurance and take away any worries you have of being
able to pay for care you may need later in life.
Everyone’s
situation is different but it’s certainly worth a look to see whether a long-term
care insurance plan makes sense for you.
In our practice we speak with many Canadians who have saved and/or are saving for retirement who have the common desire to have a rock solid core retirement income that's guaranteed to keep them in the lifestyle they prefer for life. Defined Benefit Plans once provided that guaranteed income but not many of us have those kinds of plans anymore. 
