Do you need long-term care insurance?

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.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.