Do you need long-term care insurance?

Before you buy an insurance product Bruce Sellery says you need to determine how it fits into your financial plan.

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Question

I am curious about long-term care insurance. I am thinking of purchasing it, but am not sure what would be the best option.

Answer

I would describe myself an optimist. I think this personality trait has served me well in many areas of my life. But I’m careful not to be too optimistic when it comes to my retirement. A certain amount of pessimism is prudent to ensure that you have sufficient resources in your old age, especially given the risk of health problems later in life.

My grandparents all lived into their 80s and even 90s, but two of them needed long-term care. While I like to think that I’ll be able to live in my own home for the rest of my life, there is a chance that I, too, will need additional care. There are essentially three ways to pay the costs that government won’t cover:

  • Rely on your family to foot the bill
  • Save a large enough nest egg so you can pay for it yourself
  • Or purchase long-term care insurance

What is long-term care insurance?

Long-term care insurance is much less common here in Canada than in the U.S., in part because our health care safety net is so much stronger. It can be compared to disability insurance—which is intended to protect a person’s income while they are working. Long-term care insurance protects a person’s financial resources if something happens to their health in retirement. The policy would cover things like in-home care to help you dress and eat, or help provide care in a facility, such as a nursing home.

Jason Conley, a benefits consultant with Rogers BenefitLink Resource Group, says long-term care insurance is designed to pay for expenses if a person suffers needs to move into a care facility or requires in-home care. “This would then protect the nest egg that that person had established for their ongoing retirement, or in the case of a couple, prevent one person’s illness from depleting the retirement savings of both.”

Should you pay for protection?

Deciding whether or not to pay for the protection that comes with long-term care insurance isn’t easy. You need to factor in the bigger financial picture into your decision. For example:

  • How much are you saving now, and can you continue to save for retirement as well as fund the insurance premiums?
  • How much is your nest egg likely to be worth when you are in your 80s and could you fund the $20,000 annual cost of a semi-private room in a long-term care facility?
  • Will you have family members nearby who could take some responsibility for you, or will you be relying on others if you need additional support.
  • What is your prediction for your health, based on how you’re doing currently and any other hereditary factors that might afflict you?

The Council on Aging has written a guide to long-term care insurance. It provides insight on the types of policies available as well as some ballpark costs.

Are you planning ahead?

For the right demographic, the product could be a valuable financial planning tool, says Conley. However he warns that there is a common risk that people wait too late to consider this product. By the time someone takes a serious interest in the product, the premiums make it less appealing, he says. “If a person was planning ahead they would be purchasing the contract substantially before their retirement.” It boils down to a choice of putting extra cash into retirement savings or spending more money on insurance. “It’s such a tenuous balance,” he says.

Regardless of whether you choose to buy long-term care insurance or instead build a nest egg that could cover those costs if required, the point is to plan ahead. Once that’s done you can turn your focus to cheerier topics.

ask@moneysense.ca

2 comments on “Do you need long-term care insurance?

  1. I have seen many times the children sell the house and the assets. Later once the assets are gone, the children may have to help financially help as well.

    One solution is to consider permanent insurance at an earlier age. Since long term care product usually has caps of say $100,000 or $200,000 lifetime limits which may not be enough.

    The self-insurance idea is good…but later in life person in 70's or 80's has used up their money or their money is not producing enough income so in the real world may not work. Also the waiting time to get into a good long term care can be from 60 to 180 days. This means kids have to pitch in help or hire help.

    The other question is how long do you want the money to last? If the children have to sell assets, family home to pay for long term care for the parents and may have to pay out of pocket the insurance at the end of the day can replenish the money spent.

    Reply

  2. Long term care is a basic need of elders and everyone of us will undergo aging. That's why we all long term care in the future.

    Reply

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