Long term care insurance

Long term care insurance is an insurance policy that covers some of the costs of long term care (LTC). Such costs are typically not covered by health insurance and include help with the activities of daily living. LTC it is focused on caring rather than curing. The insurance is targeted at the newly retired and soon-to-be retired population, whereas disability insurance is for the working population.

After a brief overview of that long term care is and the need to plan for it, this article provides information on LTC insurance, and a discussion on whether you need the insurance or not.

Overview of long term care

Main article: Long term care planning

Long term care includes assistance with the Activities of Daily Living (ADLs) such as eating, bathing, dressing, transfering (e.g., getting in or out of bed), grooming, and so on. It can also include help with the Instrumental Activities of Daily Living (IADLs) which includes things like using the telephone, taking medications, managing money, shopping for groceries, preparing meals, etc.

Long term care (LTC) is not part of universal public health coverage in the Canada Health Act; different provinces and territories offer different levels of support, but there will almost always be out of pocket costs involved. Those costs can represent a major spending shock for retirees, perhaps the biggest possible contingency that retirees can face, hence the need to plan for it.

The two main funding options are commercial LTC insurance, and using dedicated wealth (self-insurance).

LTC insurance basics

Types of policies

Long term care policies generally fall into three classifications:

• Reimbursement policies, where 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.

Are premiums guaranteed?

Most policies guarantee flat premiums for 5 years. After that, premiums can go up every 5 years. 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". An example is that in 2016, Sunlife rose premiums by between 1% and 25%.

When will payments start?

With an income-type 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". Some policies require you to be unable to perform more than two activities, which means that qualifying for benefits will be much more difficult.

Activities of daily living include: bathing, dressing, eating, maintaining continence, toileting and transferring (getting in and out of bed or a chair). Another benefit trigger is "cognitive impairment" or mental incapacity. 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".

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." Some plans have waiting periods of up to 2 years (e.g., ).

Is it popular?

Less than 1% of Canadians are covered by a long term care insurance policy according to one source. A survey of 50 to 70 year old people in Quebec and Ontario yielded a 11.5% rate of people "having some sort of LTC insurance coverage", but that includes collective insurance through employers and some respondents may have confused disability insurance with LTC insurance.

Potential explanations for this lack of popularity include:

• a false expectation that this care, like physician and hospital care, is fully funded and provided by government
• a lack of knowledge about LTC costs
• a lack of knowledge that LTC insurance even exists, or very low knowledge about the product
• "restrictive rules regarding the use in Canada of an individual’s medical information in insurance underwriting"
• adverse selection (only people who think that they will need LTC buy the insurance, driving up prices)
• lack of availability, and lack of competition, with many insurers having exited the market
• insurance, if available, is too expensive given the perception of the risk
• "it is relatively easy to ask help from family members, and children and relatives often feel uncomfortable to say no"

One financial planner interviewed by the Globe and Mail commented that long term care insurance (traditional income policies) was "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". Another concern was 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.

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. So after 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.

Who offers LTC insurance in Canada?

Traditional LTC insurance (income policies) had a number of features that made it unpopular:

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

There are very few insurers, if any, still offering traditional LTC policies as stand-alone product in Canada so there is a severe lack of competition. The following insurers have exited the market:

• RBC Life Insurance in 2012
• Manulife in 2017, citing "limited market acceptance of the product, as well as new federal laws that restrict insurer access to medical information", in particular genetic testing
• Desjardins, who was one of the two largest providers of LTC insurance in Canada, in 2018
• Sunlife stopped selling its traditional LTC product in 2021
• Blue Cross dropped its "Tangible" product in 2021

The following possibilities remain:

• hybrid products that combine LTC coverage with life insurance or another type of insurance
• LTC conversion options on other types of "living benefits" insurance like disability or critical illness (RBC, Manulife)
• an LTC 'lite' product from Sunlife with "a simplified application process, less generous features and lower premiums"; see for forum discussion

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. This sounds like a case where insurance could help by pooling the risks. But adoption of LTC insurance has been low, there are several issues with it, and very few companies are still offering it.

The alternative to LTC insurance is self-insurance, i.e. using your wealth in contingency planning. If you have substantial financial assets, you may be able to self-insure for some LTC expenses, perhaps up to covering 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" 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.

LTC insurance versus home insurance

Vettese (2016) 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)

Further reading

• Financial Wisdom Forum topic: "Long term care"
• Financial Wisdom Forum topic: "A-rated companies that offer long term care insurance?"

External links

• The Council on Aging of Ottawa, Long Term Care Insurance in Canada: What is it and do I need it? (note that this 2008 guide predates several insurance companies exiting the LTC insurance market)
• Toronto Star, Long-term care insurance can be expensive: Building the costs of long-term care into your retirement plan may be more cost-effective than buying long-term care insurance