Long term care insurance

From finiki, the Canadian financial wiki

Long term care insurance is an insurance policy that covers the costs of long-term health care that is not covered by health insurance. It includes help with the everyday activities of daily living and thus it is focused on caring rather than curing.

This article provides an overview of what long term care (LTC) is, and how much it costs, followed by basic information on long term care insurance, and a discussion on whether you need the insurance or not.

Overview of long term care

What does long-term care mean?

Long-term care[1] services may include:

  • nursing care
  • rehabilitation and therapy
  • personal care (help with activities of daily living such as dressing, eating and bathing)
  • homemaking services (cleaning, laundry, preparing meals)
  • having another person there to watch over you and help you when and where you need it

Depending on how much care you need and the choices you and your family make, this care can be received:[2]

  • in your home
  • in the community (e.g., adult day centres)
  • in a facility such as a nursing home, a chronic care facility, personal care home, or assisted living facility

When will I need long-term care?

Your need for health care and personal care will change over time. You might pass through 5 stages of care[3][4], to some degree, in retirement, although most people don't reach stage 4 or 5.[citation needed]

Stage 1: Independence In stage 1, your independence is still intact:

  • You are self-sufficient and able to manage chronic health problems and disabilities without the help of others.
  • There's no immediate impact on your family.

Stage 2: Interdependence In stage 2:

  • Some health problems begin interfering with daily living, making some functional tasks painful or more difficult.
  • Family members begin helping out more with cooking, house cleaning, shopping and banking, but formal care is not yet in place.
  • Families may begin considering seniors' residences designed for independent living.

Stage 3: Supportive living In stage 3, you're starting to become more dependent on others:

  • You are more dependent on others for practical chores like meal preparation, cleaning, shopping and transportation, and may need some limited direct help or stand-by assistance with personal-care items such as dressing, bathing and grooming.
  • Both family support and some formal care are in place, and may include: home care services for help with meal preparation and dressing, adult day care centres, assisted living facilities or retirement residences.

Stage 4: Complex care (crisis management) In stage 4, you're dependent on others, but home care may still be an option:

  • You are dependent on others for most of your care due to multiple health and personal care needs.
  • The demands on family members might become unsustainable
  • Formal home care may be insufficient or too expensive.

Stage 5: Dependence In stage 5, your extensive care needs are being met in a long-term care facility:

  • Admittance to a long-term care facility as skilled nursing care and extensive personal care are needed.
  • Family members can no longer meet the overwhelming care requirements - safety is an issue without 24-hour care

What does long-term care cost?

How much?

Long-term care costs are managed at the provincial (or territorial) and community level. What you pay will depend on where you live and the personal choices you make:

  • It can cost from $900 to over $5,000 per month to stay in a long-term care facility.[5][6]
  • Costs for private services range widely: you can pay from $10 to $90 an hour for homemaking, personal care or nursing care.[5][6]

The cost to you depends on:

  • the type of room you stay in
  • how much government funding is available in your province or territory

The Globe and Mail has an online tool that shows the maximum costs of long-term care in government-subsidized facilities, by province, for different periods of time. Note that these facilities tend to have significant waiting lists. This tool also contains links to official government websites detailing the costs for each province.

For how long?

A U.S. Department of Health and Human Services study from 2022[7] projects the risk of needing LTC people tunring 65 in 2020-2025 based on a "microsimulation model". Their definition of LTC is having a disability that requires help with "at least two ADLs (activities of daily living) that is expected to last at least 90 days or a need for substantial supervision for health and safety threats due to severe cognitive impairment". The results are as follows:

Life expectancy and average years of LTC needs for today's 65 year olds:
Total Men Women
Life expectancy at age 65 20.5 19.1 21.9
Average years of LTC 3.1 2.5 3.6
Percent with LTC needs 56.4 48.6 63.7

Those averages hide a spread of possibilities, better visualized with the distribution of LTC needs:

Distribution of LTC needs, % of population
Total Men Women
None 43.6 51.4 36.3
<1 year 11.9 11.2 12.4
1.00-1.99 years 7.9 7.1 8.6
2.00-4.99 years 14.7 12.8 16.4
>5 years 22.1 17.5 26.3

These data reflect all forms of long term care that match the definition, whether paid or not. Of the 3.1 years average need, about 0.8 years is projected to consist of paid care (0.6 years for men and 1.0 years for women); the rest will be supplied by family members and so on. The proportion of people who will need 2-5 years of paid care is 9.5% of the population, and 4.4% will need more than 5 years. About 45% of the population will require at least some paid care. Recall that the definition of needing LTC in this study is quite strict, so the statistics would go up if the definition was less rigid.

Comparable detailed data for Canada is difficult to find. The overall likelihood of ever needing LTC (probably of the paid kind) is about 17% according to the Canadian Life and Health Insurance Association[8] but that seems rather low in light of the US projections just mentioned.

So needing some LTC is relatively likely, but for how long will that LTC be needed? The Globe and Mail tool linked above mentions that "the average length of stay in a long-term care facility is about 18 months" according to the Canadian Institute for Health Information. Another Canadian article puts the average "length of time that care is required" at 2.2 years.[9]

Another undated statistic is that at age 65, "20% of individuals will require care for more than five years in their remaining years".[10] (The last two articles don't provide the sources of those statistics.)

Typical costs by province and territory

Sunlife, a company that offers LTC insurance, provides reports showing typical costs for government-subsidized long term care facilities, for private retirement homes, and for home care, for each province.

A tail risk

Putting it all together, "the risk of needing extended facility-based LTC in old age is a low-frequency, high-severity risk", also known as a tail risk.[11] According to one US actuarial study that relies on simulations, LTC costs were zero for two thirds of cases but $600,000 (present value) in 5% of the cases.[11] In a Canadian context, 5 years in a private LTC facility at $5k per month could cost $300k.

In theory, insurance should be ideal to hedge such a tail risk, but in practice, there are issues.

Long term care insurance

Types of policies

Long term care policies generally fall into three classifications:[2]

  • Reimbursement policies, where as the name suggests you are simply reimbursed for long term care expenses, typically up to designated limits.
  • Indemnity policies, where the eligible benefit is paid when qualified expenses (actual care) have occurred.
  • Income policies, also know as cash or disability plans, where the eligible benefit is paid without the requirement that qualified expenses (actual care) have occurred.

There are pros and cons associated with each type of policy that should be considered. For example, the Council on Aging of Ottawa considers that income policies are the most flexible and easy to administer, but also the most susceptible to fraud and the most prone to elder abuse.[2]

When will payments start?

With a LTC policy, payments typically only start when "you are unable to perform two or more activities of daily living and you require professional assistance at home or in a long-term care facility".[12] Some policies require you to be unable to perform more than two activities, which means that qualifying for benefits will be much more difficult.[2]

Activities of daily living include: bathing, dressing, eating, maintaining continence, toileting and transferring (getting in and out of bed or a chair).[6][12] Another benefit trigger is "cognitive impairment" or mental incapacity.[2] According to the Canadian Life and Health Insurance Association (CLHIA), your ability to perform those activities would be "assessed by representatives from the insurance company to determine your eligibility for benefits".[6]

CLHIA explains that "most plans include a waiting period. This means once you qualify for benefits, you must wait a specified period of time before your benefits will be payable. Common waiting periods are between 30-90 days."[6] Some plans have waiting periods of up to 2 years (e.g., [13]).

Is it popular?

Less than 1% of Canadians are covered by a long term care insurance policy.[10] PWL Capital (a portfolio manager) reports that:[14]

  • Coverage is subject to strict underwriting conditions.
  • Asthma and sleep apnea are just two conditions that would preclude coverage.
  • By age 61 only half of applicants meet the underwriting conditions.
  • Coverage is limited to 2-5 years in many policies, so the most worrying case of extended LTC may only be partially covered

Another issue is that there are very few insurers still offering LTC policies as stand-alone product in Canada[15] so there is a severe lack of competition.

Finally, in a US study, a quarter of LTC policy holders who were admitted to a nursing home had let their policy lapse, perhaps inadvertently, during the previous four years.[16] So after paying paying LTC insurance premiums for many years, they were not insured anymore when they needed it, perhaps in some cases because cognitive decline had started and they forgot to pay the premiums.

Do you need insurance?

Not everyone will live in a long term care facility before they pass. Among those who will, some might only stay a short time, whereas others will be there for many years, with large total costs which could deplete all of their savings. In other words, the total costs of long term care are not knowable in advance.

Despite this uncertainty, an alternative to long term care insurance is self-insurance.[17] If you have substantial financial assets, you may be able to cover the possibility of living in a long term care facility for a significant time. One advantage of this method is that you may also use these private savings to purchase services such as "house cleaning, grocery shopping, transportation, and even home care"[17] that are not, or may not be, covered by long term care policies, but may be needed to stay in your own home longer. Some people also look at a mortgage-free home as a source of funds for long-term care (by selling the home or taking a reverse mortgage). And if you die without having required long term care services, then your assets (financial or real estate) will be passed down to your heirs, whereas with insurance, your premiums are gone.

One financial planner interviewed by the Globe and Mail comments that long term care insurance is "very expensive" and that "the cost of coverage requires individuals or couples to often trade off some other very important things that they are allocating to, such as retirement savings".[8]

Another concern is that "once a buyer has been approved by a carrier, premium prices can go up", which means that the coverage may need to be reduced to keep it affordable, or perhaps even the policy cancelled.[8] In more detail, according to the Council on Aging of Ottawa, "if claims become higher than planned for, an insurance company can raise premiums for the entire class of policyholders. However it cannot raise individual policyholder’s premiums because of health status or age".[2]

LTC insurance versus home insurance

Vettese (2016)[18] devotes two chapters to long term care and LTC insurance. He compares LTC insurance with home insurance. With both LTC and a house fire, the odds of an expensive event are low, but the consequences are potentially large. With home insurance,

  • the potential losses are clear and quantifiable
  • the deductible can be set high if desired
  • any loss in excess of the deductible will be covered (up to the limit, but the home reconstruction value is quantifiable)
  • the premiums are reasonable relative to the coverage
  • you can change insurer if your premiums rise

With LTC insurance,

  • the potential losses are difficult to estimate
  • the premiums can rise
  • in many policies, there is no guarantee that the entire cost of LTC will be covered
  • the deductible is low (coverage often starts after a relatively short waiting period, although see above)
  • the premiums are rather high
  • you can't easily change insurer (LTC insurance is a long term commitment)

References

  1. ^ Sun Life Financial, What does long-term care mean?, viewed Aug. 30, 2012.
  2. ^ a b c d e f The Council on Aging of Ottawa, Long Term Care Insurance in Canada: What is it and do I need it?, viewed February 1, 2017
  3. ^ Sun Life Financial, When will I need long-term care?, viewed Aug. 30, 2012.
  4. ^ 5 Stages of Caregiving, Caregiver Solutions Magazine
  5. ^ a b Sunlife (a LTC insurance provider), 5 things to know about long-term care insurance, December 3, 2019, viewed March 19, 2024.
  6. ^ a b c d e Canadian Life and Health Insurance Association (CLHIA), A guide to long-term care insurance, viewed March 19, 2024
  7. ^ Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, Long-Term Services and Supports for Older Americans: Risks and Financing, 2022, viewed March 20, 2024
  8. ^ a b c Augusta Dwyer, Should you buy long-term-care insurance?, The Globe and Mail, February 3, 2016, viewed February 1, 2017
  9. ^ groupbenefits.ca, Long Term Care Insurance, viewed March 19, 2024.
  10. ^ a b evidencenetwork.ca, The real costs of long-term care for Canada, viewed March 19, 2024.
  11. ^ a b Vickie Bajtelsmit and Anna Rappaport, The Impact of Long-Term Care Cost on Retirement Wealth Needs, Society of Actuaries, 2014, viewed March 19, 2024.
  12. ^ a b Rino Racanelli, Long-Term Care Insurance, Canadian MoneySaver, February 2010 issue
  13. ^ Sunlife, Sun Retirement Health Assist, viewed March 25, 2024
  14. ^ PWL Capital, Should we care about Long Term Care?, July 18, 2018, viewed March 19, 2024.
  15. ^ LSM Insurance (a broker), LTC insurance, viewed March 19, 2024.
  16. ^ Pfau WD (undated) Concerns and Risks for Traditional Long-Term Care Insurance, viewed March 21, 2024, US content
  17. ^ a b Margot Bai, Long-Term Care Insurance, Canadian MoneySaver, May 2010 issue(subscription required), viewed January 22, 2017
  18. ^ Vettese F (2016) The essential retirement guide: a contrarian's perspective. Wiley, 270 p. (ISBN 1119111129)

Further reading

External links