Long Term Care and Retirement Health Assist (“Long Term Care Lite”): Keeping the “Me” in “Retirement”

Introduction

No matter how carefully I shop or slice and dice the components, there are far too many mystery meats among the ingredients of my retirement planning stew.   Despite my best efforts, I can’t guarantee how long you’ll live, that your equities will earn at least 6% annually for life or that you’ll need precisely $60,000 per year in after-tax income until you drop dead at precisely 92 years and 3 months after your date of birth.  Moreover, don’t even get me started about future tax and legal changes, exchange rate fluctuations or cost of living adjustments!

As a financial planner / lawyer / professional worrier, I see my job as a risk manager rather than a promise-maker.  In other words, although life will always be full of surprises, I want most of them to be like finding extra Easter Eggs rather than parking tickets.   This is where Long Term Care (“LTC”) and Retirement Health Assist (“RHA” or, as I call it, “LTC Lite”) come in.

In addition to assuming that you’ll live to an overly ripe old age and steering you towards boring, stable investments rather than sexy junior equities when you don’t need high returns to reach your goals, I encourage clients to hedge their healthcare bets.  Although paying for insurance sucks, wishing you’d paid for it later when you need the protection sucks even more.

LTC and LTC Lite – What Are They and Why Bother

Although I’ll let your own financial advisor explain the fine print to you, here’s a thumbnail sketch to get you started.  Both LTC and LTC Lite (which is the new kid in town) pay out if you need someone standing by or cannot manage the following activities of daily life:

• Toileting;
• Bathing;
•  Changing;
•  Eating;
• Transferring; or
• Are afflicted with incontinence issues to the point where you can’t manage your own daily hygiene

In addition, even if none of above apply, you can still claim if your cognitive abilities have deteriorated to the point where your memory and judgement no longer allow you to keep yourself safe.

In order to claim, your doctor signs a form confirming your problems, your insurer decides whether you qualify and, after the necessary waiting period, you start getting tax-free cheques to spend any way you’d like without having to submit receipts for as long as your problems persist (although some companies do sell reimbursement-based products or those with a lifetime limit.)  Most people use the cash to hire a home care worker, make their home more accessible, pay for a private retirement home or assisted living facility or purchase any other amenity or service that makes their and their family’s lives a little bit easier and brighter.

The big differences between LTC and LTC Lite focus on who qualifies and how long you have to wait to get benefits.  LTC costs more and is a lot harder to get, as you can get payouts at any age after waiting usually 90 days after diagnosis.  In other words, if you were 45 years old and hit by a bus 2 days after being approved for LTC, were disabled for life but lived for another 30 years, you could theoretically get as much as $120,000 per year, starting 3 months after your accident.  This money may go up every year at 3% if you also purchased an inflation protection rider.

On the other hand LTC Lite focuses exclusively on retirees (even if you buy it during your working life) and only pays out 1 or 2 years (depending on which option you select) after your[C1]  insurer approves your claim and your condition persists.  Moreover, in addition to having to self-fund for the first year or two, you must also have also owned your policy for at least 5 years  previously or are 65 years or older, whichever is later.  In other words, in the LTC example above, that 45 year old wouldn’t start getting LTC Lite cheques until he was 66 (or 67 if he opted for the two year waiting period.)  Conversely, if someone purchased a policy at 68 and he became disabled at age 70, he would not get LTC Lite cheques until he was 74 (i.e. 5 years after policy purchase and another year’s wait afterwards.)

There are some other differences between the two products as well.  LTC allows you to pay for lifetime protection over 25 years if you want, while LTC Lite makes you keep paying for life until you’re on claim. In other words, if you buy LTC young enough, you can be done paying for it prior to retirement!

As well, you need to be at least 45 to apply for LTC Lite (unlike LTC, which is open to people in their 20’s) and no older than 71.  On the other hand, LTC Lite also automatically provides you with 3% inflation increases each year while on claim, while LTC makes you pay extra if you want this feature.  Noting how quickly healthcare costs are rising, however, even 3% indexing may not be enough, especially if it doesn’t kick in until you’re on claim in the first place.  Accordingly, some people factor this into the equation when deciding how much coverage to buy by bumping up their initial coverage or purchasing non-indexed LTC for a larger amount than they’d need if they currently were on claim.

People Who Should Consider LTC

Despite what its name implies, LTC isn’t just for the significantly disabled who stay on claim for life.  Provided that their doctor confirms their condition, someone can get payments as soon as one month (although three months is the new standard) later even if their condition only lasts for a few months.  As an added bonus, LTC benefit payments don’t affect long term disability insurance payments.  Even better, the amount of LTC benefits you can purchase isn’t related to your salary (unlike disability insurance.)   Accordingly, I suggest investigating LTC insurance if:

• You’re self-employed and don’t earn enough income to get the disability insurance coverage you need.  For example, many business owners draw an artificially low salary because they also take dividends, keep excess earnings inside their company or a holding company, or income split with other family members.  Since you can’t get the amount of disability coverage you need, look into LTC to either top up your disability or as an alternative.  When investigating these options, it’s also important to know LTC and Disability Insurance pay out under different circumstances: disability coverage pays when you can’t work while LTC kicks in when you can’t perform daily activities. For example, LTC won’t pay out if you’re on stress leave if you can still do your basic activities of daily living. Conversely, disability insurance may stop payouts when someone is able to return to work even if that person still qualifies for LTC coverage.  Finally, when reviewing Disability Insurance, be sure to understand how disability is defined in your policy and if this definition changes 2 years after going on claim.  For most group plans, while you’re covered if you can’t do your own job for 2 years, coverage ceases at this point if you’re capable of other reasonable employment, no matter much less this might pay.

• Stay-at-Home Parents.  Although you may not earn a salary for taking care of the family and running the house, if you weren’t able to do your thing, the costs of replacing you, combined with the costs of getting you better could be astronomical.  LTC is a way of protecting you and your family when you don’t qualify for disability insurance.

• You are on track towards a modest retirement to comfortable retirement but are not an endless pit of money.  Although I suggest also investigating LTC Lite if you enough resources to self-insure for several expensive years, I suggest looking at LTC if you can’t afford to be disabled for a year before receiving benefits and, even more so, if you’re looking into buying coverage in your mid 60’s and onward, which can mean having to fund for as much as an additional 7 years after becoming disabled (i.e. 5 years after policy purchase and up to another 2 years after this point if you became disabled the moment after you bought your policy.)

• If you’re in a couple at or approaching retirement and your partner won’t qualify for either LTC or LTC Lite or you’re already a caregiver.  If your disability would mean hiring care for both you and someone else, waiting even an extra year for benefits might be a financial tsunami.  Moreover, even if you’re well off now, unless you’re filthy rich, things could be tight later if your partner has a huge uncovered health bill, especially if you’re both on claim at the same time.  I also worry about what’s left for the caregiving spouse if most of the couple’s retirement dollars pay for the first spouse’s care costs.

On the other hand, I suggest looking into LTC Lite if:

• You can’t qualify for LTC and but still expect to live well into retirement.  A friend of mine, Susan MacLeay of Sun Life Financial who specializes in the product, estimates that almost 50% of the applications to purchase LTC insurance are refused (although she may have been just saying this to make me feel better when I was turned down.)  Although I can’t go on claim until 66 at the earliest under my LTC Lite policy, at least I know that I’m protected beyond that point.  Moreover, many of us have disability insurance through work to protect us to that point as well as products like Critical Illness Insurance to help the cause in the case of conditions like cancer, heart attacks, strokes and other qualifying conditions that occur before then.

• You likely have enough resources to cover healthcare costs personally but want to protect the size of your estate.  I compare this option to either hedging your portfolio or buying home owner’s insurance.  Even if you could absorb dramatic stock market corrections or pay to rebuild your palatial estate out of your own pocket if your house burnt down, why take the risk if the cost of coverage is incidental relative to the risk averted?  If you’re in a similar situation, you can also look at meeting in the middle as second option: getting enough LTC Lite coverage to top up your own resources rather than providing full protection.  Many people in this boat rightly point out that they would simply spend some of the money they’d spend on travel, country clubs and Canucks’ seasons tickets (assuming they are actually worth watching again by that point) on nurses and assisted living.  All the same, a little coverage can mean a lot bigger estate for the kids.  Looking at another alternative?  Consider reducing your premium costs by agreeing to wait 2 years rather than 1 after otherwise qualifying for benefits.  Alternatively, despite the cost, look into buying a return of premium option that pays your heirs the premiums you put into the policy on death.  In that instance, all your heirs will lose is the potential growth on the money you’ve paid in premiums along the way.

• You are 5+ years until turning 65 and have a gold-plated disability insurance plan.  Although LTC is still worth investigating, maybe you really only need coverage from when your disability coverage conks out.  If you purchase LTC Lite more than 5 years before retirement, after you turn 65, the only real differences between the products are that you’ll have to wait 9 months longer (if you purchase that option) to go on claim and that LTC Lite premiums will continue for life until you go on claim, unlike regular LTC policies which allow you to pay up the policy for life after 25 years.

The Case for LTC and LTC Lite

I’ve always been intrigued by how much more popular LTC coverage is in the U.S. compared to Canada; for whatever reason, LTC has been a difficult sale in Canada, particularly in B.C.   Another insurance advisor of mine, Sean Peach of Sun Life Financial, directed me to look at the huge amount of money insurers have to pay out on these claims in the U.S., which tells us both that these products were probably underpriced and that there a ton of policyholders down south that are incredibly grateful for having this coverage. Some of my LTC-selling friends point to the following factors why Canadians haven’t embraced this product as fully as their U.S. counterparts:

• Universal Healthcare in Canada means that medical costs in the states can easily dwarf our own;

• People focus on the level of healthcare currently provided to their parents or others currently residing at public assisted living or extended care facilities and assume that it will always be this way.  Due to healthcare costs rising well above inflation and our greying population, most predict that the current level of public healthcare is unsustainable.  Accordingly, the future probably will mean less for more. Furthermore, most provinces charge extended care residents a percentage of their income.  If other provinces start following Nova Scotia’s lead and include the resident’s assets in addition, this can quickly eat into the size of the estate left behind for the next generation.

• Life is expensive in B.C.  Apparently, Vancouver is one of the most expensive places to live in the world relative to people’s incomes and I see nothing that says otherwise.  Accordingly, perhaps people cannot afford LTC even if they see the need.  My hope is that LTC Lite will become an effective alternative for those of us struggling to pay down the mortgage, put some money away for retirement and actually having a little bit of fun along the way.

• High decline rates.  Most of my advisor friends have grown increasingly frustrated selling LTC because of the stringent underwriting process.  Many who don’t specialize in this area have decided to focus on other products as a result. To make it worse, it is not uncommon to see a spouse who’s been accepted for coverage decline the policy when her hubby is refused, even though I would argue that this makes her policy even more essential.  Again, the simple application process for LTC Lite, which took me about 10 minutes and didn’t cost me any bodily fluids, means that many people who can’t qualify for LTC can get LTC Lite.

• Lack of Awareness.  I estimate about 1 client in 10 knows about LTC.  Since its recent launch, I’d be shocked if 1 in a 1,000 knows about RHA / LTC Lite.  Moreover, LTC’s name appears to give people the false idea that it’s only for retirees or near retirees.  Of course, many people who wait until that point to apply are no longer healthy enough to be accepted or are faced with premiums that are enough to induce a health crisis on their own.

Conclusion

I was preparing for a retirement planning seminar for lawyers a few years ago when I first came across the expression “disability-free lifespan.”  I was shocked to see that for Canadians that it was number in their mid-60’s even though the average lifespan was around 80.  Of course, the numbers are skewed by people who are disabled at a relatively young age, just like our general lifespan estimates are dragged down by people who die young.  Focusing more specifically on the LTC market, current insurer estimates suggest that the average person on claim receives about 3 years of benefits.  In any event, both these stats tell me that it’s pretty common for people to be disabled for a significant period before they die.  Moreover, from working with seniors, I understand how tight budgets can be stretched at that point in life in particular.

Inevitably, not everyone taking out LTC or LTC Lite Insurance will go on claim.  Moreover, the return of premium option is usually too costly for most of us.  According many of us will not get a penny out of the policy and others will not get out what they’ve put into it.  On the other hand, if the money you’ve put aside to protect against the very real risk of prolonged healthcare costs wouldn’t have made a significant difference in your life if you’d spent it elsewhere, then who cares?  As I said many, many pages ago, my version of financial planning focuses on maximizing your chances of success rather than maximizing the size of your portfolio if that means courting unnecessary risks.  LTC and LTC Lite are great ways to increase the chances that you and your loved ones get the healthcare you need and that you don’t have to become an amateur nurse if your spouse or a parent goes on claim.  If nothing else, isn’t it worth at least a look?