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Planning for the Costs of Long-Term Care

April 15, 2021

With the rollout of Covid-19 vaccines beginning to reach more people, one of the better stories over the last few months has been the knowledge that residents in long-term care homes received their vaccines.

Better yet, the indications are that as a result, Covid-19-related deaths have largely stopped in those locations.

One of the most significant focus points when the pandemic “ends” will concern long-term care.

At a macro level, this should involve funding, equipment, training, and compensation. The micro-level is equally important. By “micro-level”, I mean the funding of long-term care costs by individuals.

Long-term care insurance is a critical aspect of your financial plan

With what we’ve seen unfold in the pandemic, it might seem like “long-term care” and “long-term care home” are synonymous.

While long-term care homes are a large part of the delivery of long-term care, we are increasingly seeing people choose to stay home and have care services come to them. Either way, the costs for long-term care can be significant.

Budgeting for the Costs of Long-Term Care

This is where your retirement budgeting comes in. I can’t stress enough the importance of preparing a budget for your retirement.

Retirement budgets will help you make the best of the long-term care options available to you once you retire.

Actually, you should be making 2 budgets: one reflecting “normal retirement” and one reflecting a requirement for long-term care.

Suppose—regardless of whether care was at your home or in a long-term care home—monthly long-term care costs would amount to $4,000 per month.

Could your “normal income” fund these long-term care costs?

If long-term care is brought into your home and/or one person requires care and another in the home doesn’t, not only will there be long-term care costs, but also the costs of running and maintaining the family home.

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Should you rely on your home’s equity to fund long-term care costs?

Many people will look at their home equity as the “backstop” for funding potential long-term care costs. In that regard, it’s important to mention that real estate prices can fall as well as rise – though admittedly the last significant decline happened about 30 years ago.

More importantly, renewed emphasis has been placed on implementing measures to “cool down” hot housing markets. If some of the more extreme measures which are being contemplated—such as limiting the extent of the Principal Residence Exemption relating to capital gains on the sale of a principal residence—were implemented, that could have a notable effect on the equity available to fund long-term care costs.

Suppose you could plan for some assistance in dealing with these potential costs. This is where Long Term Care Insurance comes in.

What is Long-Term Care Insurance?

Long Term Care Insurance is coverage that provides a monthly benefit where you are unable to perform a certain number (generally 2) of the “activities of daily living” – such as eating, dressing, washing etc.

Some long-term care insurance policies distinguish between benefits paid for home care and benefits paid for facility care, while others don’t distinguish a difference.

Coverage can generally be applied up to the age of 80, though realistically the costs become prohibitive once later ages are reached.

The Cost of Long-Term Care Insurance: Example

Consider the following policy example:

  • 49-year-old female
  • Non-smoker
  • Good health

One long-term care insurance provider is charging an annual premium of $2,004.82 payable for life for coverage that would provide a benefit of $2,000 a month for home care (for up to 5 years) and $2,000 a month for facility care (for up to 5 years).

For the period up to when a claim would be applied, the benefit would index at 3% annually. Suppose that the individual applying for this policy was approved at standard rates, and made a claim against the policy around the time of her life expectancy, age 85.

Therefore 36 years of premiums were paid, for a total of $72,173.52 in premiums (no premiums are payable while on a claim).

The nominal amount of the monthly benefit would have increased to just under $5,800 by that time (36 years at 3%). Suppose that two years of care are required: that suggests the policy will pay out $139,200 over the two-year period – almost twice the amount of the premiums paid.

Premiums paid: $72,173.52

Benefits received: $139,200

How do you pay for Long-Term Care Insurance Premiums?

An understandable question at this point might be: how do I pay for policy premiums for long-term care insurance? Of course, regular cash flows sustaining the premium is everyone’s goal.

When regular income cannot sustain the premiums—or you would simply prefer an alternative—your investments could be put to use.

Suppose you invest in a balanced mutual fund that pays a distribution of 4% annually. If a total of $51,200 was invested in such a fund, it would produce annual distributions of $2,048, sufficient to pay for the annual premium.

The Canadian Life and Health Insurance Association (CLHIA) has prepared a useful booklet on long-term care insurance coverage. Click here to view the Guide to Long-Term Care Insurance.

Does long-term care insurance make sense for your financial plan? Speak to your Scrivens advisor and get a long-term care insurance quote.