Take no chances

By Clay Gillespie | September 18, 2012 | Last updated on September 18, 2012
5 min read

With the markets still in flux, consumers are becoming increasingly anxious about protecting their assets. Long-term-care insurance (LTCI), which surfaced in Canada about 15 years ago, has emerged as a go-to product when developing a comprehensive financial plan.

With a vast number of Canadians approaching their mid-60s, the need to insure against catastrophic health problems is greater now than ever before. Though the government offers financial assistance, the harsh reality of health costs tells us aid might not be enough.

LTCI basics

One of the critical catches of an LTCI policy is that it only pays out when a person suffers cognitive impairment or can no longer perform two of the following six activities:

  • bathing
  • dressing
  • eating
  • maintaining continence
  • toileting
  • transferring (moving into or out of a chair, bed or wheelchair)

It’s important to convey these restrictions to clients when addressing LTCI options, because many assume this insurance will fund voluntary stays at a retirement community. With room and board in some retirement communities costing upward of $5,000 per month, clients should never assume their insurance will fund all associated costs.

Similar to disability insurance, LTCI has an elimination and benefit period. The premiums for LTCI vary depending on the benefit period, which can range from a certain number of years to the remainder of one’s life. These benefits may also be used to fund home care.

According to RBC’s 22nd annual Registered Retirement Savings Plan Poll, 91% of Canadians between the ages of 55 and 69 say if they outlive their savings in retirement, the idea that their families would help them financially was not very appealing.

Likewise, 72% worry about balancing their asset allocation for immediate needs and longer-term goals.

Certain policies also allow for a return of premium—if clients don’t end up using the LTCI, they can receive a refund. A beneficiary is also entitled to the refund if the client dies before using the LTCI.

LTCI limitations

The Canadian government covers a significant portion of healthcare costs and provides government-funded facilities to those suffering from an extended illness or injury.

As a result, many Canadians think they don’t need LTCI or other long-term-illness-related insurance products. Other countries tend to have a slightly different attitude toward insurance and view it as a necessity.

The conditions imposed for LTCI payouts can sometimes prove tricky as selling points—people feel once they reach a stage where they can no longer fulfill part of their daily living functions, their end is almost near.

On the other hand, some clients who purchase LTCI policies think they might never fully see the benefits despite being ill, because they’re still able to perform the six basic daily living functions.

Clients frequently express more interest in “Term to 100” life insurance, because it’s much more affordable. Besides, its payout to beneficiaries is guaranteed. LTCI offers no payout guarantee; it simply serves as a safety net.

LTCI candidates

Despite such limitations, LTCI can prove a smart investment for many clients, including those who don’t qualify for life insurance. It’s capable of offering benefits similar to life insurance, and has an array of customizable features. Clients with a frequent and steady cash income, but who haven’t invested much in other assets, can benefit greatly from LTCI.

For example, your clients may have a high pension income, but no mortgage because they’re renting property or living with family. Since they’re not heavily invested in outside assets, LTCI makes sense because they can afford the safety-net premium.

LTCI is becoming increasingly popular with the sandwich generation, or those who care for their aging parents while also supporting their children.

According to Concerto Marketing Group’s 2012 Horizons Retirement Survey (commissioned by Rogers Group Financial), one in five Canadian pre-retirees expect to financially take care of their parents in the future. This report surveyed Canadians between the ages of 46 and 64 who are planning to retire in the next three to seven years.

This recent trend has propelled many children to purchase the policy for their parents. In the event of a long-term-care incident, many children cannot afford the steep medical costs associated with extended-care facilities. By purchasing LTCI coverage for parents, they can avoid financial setbacks of their own.

LTCI is a very effective way for aging retirees to avoid relying on the support of family members in their golden years. While retirement may become a bit trickier in the near future, LTCI will serve as an adequate resource for many clients.

Three-quarters of Canadians admit their financial plans don’t account for long-term care, according to the Canadian Life and Health Insurance Association (CLHIA).

Further, 55% believe government programs cover the majority of those costs.

That’s not the case.

It will cost $1.2 trillion for Canada to provide long-term care to baby boomers, and current government programs only cover about half of this, according to CLHIA, which adds the resulting $590 billion funding shortfall is equivalent to 95% of all individual registered savings plans in Canada.

So how can advisors help? By educating clients on the need to save for long-term care and tailoring advice based on income levels and the different levels of care provided by each province.

“Make sure clients understand what they are and aren’t accountable for,” says Stephen Frank, vice president, policy development, CLHIA. “Go through options with them, such as saving directly or purchasing long-term care insurance.”

LTCI for the rich

Some of us may have clients who can self-finance their medical care, even if they chose to receive treatment at a rather expensive facility. These clients tend to steer clear of discussing LTCI policies with their advisors.

When working with wealthier clients, reassure them that while they can afford to self-finance medical costs, oftentimes it will hurt their estate.

These extensive medical bills could dig heavily into other investments and force them to make substantial financial adjustments. LTCI is an effective way for this clientele to protect well-developed assets from a medical emergency.

Ideally, we should advise clients to start paying for LTCI coverage when they stop paying for disability insurance. Switching funding from one type of insurance to another is usually the smart thing to do, but there’s never a cookie-cutter solution. Each client has unique needs.

Remind clients that like many other Western nations, Canada is facing a severe demographic issue. The retiree generation is currently approaching age 67, which means it will be another seven years before the middle bulk of the generation turns 65.

With 90% of healthcare dollars being used in the last five years of our lives, this means the healthcare system has yet to encounter severe stress. On average, these retirees have anywhere from 15 to 20 years to live.

In the coming years, the system may no longer be able to protect your clients the same way it does today. LTCI is an effective way to put some insurance in place before these issues arise.

While LTCI may not be the right fit for every client, it definitely is a policy worth offering as an option. With changes in our nation’s healthcare system on the horizon and baby boomers hovering on the brink of retirement, interest for products like LTCI is bound to spike.

Clay Gillespie is a financial advisor, portfolio manager, and the managing director of Rogers Group Financial. The views expressed are those of the author and not necessarily those of Rogers Group Financial.

Clay Gillespie