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Long Term Care or Other Priorities?

WAWA032

Is Long-Term Care in Your Future?

We have all heard stories of the elderly (or people

charged with their care) burning through hundreds

of thousands of dollars a year in their last years of

life at home as a group of caregivers tend to their

needs.

Is Long-Term Care in Your Future?

• The problem is that LTC needs vary widely from

one person to the next.

• The LTC solutions also vary widely in terms of cost,

and it is only a small percentage of situations

where costs become astronomical.

What Does LTC Entail?

• LTC refers to situations where one is unable to live

independently and there is no reasonable hope of recovery.

• More specifically, LTC is when a person can no longer

perform two or more basic activities of daily life (ADLs)

without substantial assistance (e.g. adjustable beds, canes,

walkers, wheelchairs).

The list of ADLS includes:

• Bathing / Dressing / Toileting

• Transferring (moving into or out of a bed or wheelchair without assistive

devices.)

• Continence (ability to control both bladder and bowel functions or to

maintain an acceptable level of personal hygiene if not able to control

them).

• Feeding (being able to eat without assistive devices)

• LTC is also needed for cognitive impairment, loss of

intellectual capacity so that continual supervision is required

to protect the individual.

• Cognitive impairment is measured by standardized tests to

assess impairment relating to:

1. short or long-term memory,

2. orientation as to person, place, and time, or

3. deductive or abstract reasoning.

Cognitive Impairment Questionnaire

• What is the date today?

• What day of the week is it?

• What is the name of this place?

• What is your phone number?

One is deemed cognitively impaired, and hence

disabled, if one makes three or more errors answering:

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• What is your street address?

• How old are you?

• When were you born?

• Who is the president of the USA now?

• Who was president just before him?

• What is your mother’s maiden name?

• Subtract 3 from 20 and keep subtracting 3 all the way down.

Cognitive Impairment Questionnaire

Note: People may suffer from long-term illnesses.

For example Alzheimer’s or Parkinson’s disease - and

need some assistance long before they qualify for LTC.

It is when one’s needs grow beyond the ability of the

family to manage on their own that the high costs of

LTC might come into play.

Starting with the most expensive, the basic

LTC options are:

• Private home care provided round-the-clock by a team of

personal support workers (PSWs) and private nursing.

• The annual cost can top $200k and can easily persist for 5

years or longer.

• Only the wealthiest can afford this option.

Starting with the most expensive, the basic

LTC options are:

• Privately run assisted living retirement homes where the care may

be supplemented by outside PSWs coming in on a regular basis.

• Not subsidized by govt.

• For a one-bedroom suite plus 4 hours a day of outside care being

provided, could cost between $40K and $100K a year or more.

The basic LTC options are:

• Government-run (or govt subsidized) nursing homes

where LTC residents pay for better accommodation but

govt pays for everything else. Annual cost of about $30K

to $40K.

• Govt-run nursing homes involving basic (ward)

accommodation. No one will be turned away for lack of

money so cost is basically nil.

The basic LTC options are:

• Remaining at home with basic care provided by family

with visits to hospital for medical attention as needed.

Paid caregivers might provide some home care for

several hours a day. Cost of $35K or less.

Affordable but puts strain on family.

• Govt subsidies sometime available to pay for some

outside care, but given growing proportion of population

over 65, demand for resources will outpace supply.

• Safer to not to rely on these subsidies when assessing

potential cost of LTC.

What are the Chances You Will Need LTC?

• The US Congressional Budget Office estimates that

33% of individuals turning 65 will need nursing home

care at some point in their live for 3 months or more

(which makes them LTC-eligible).

• The Society of Actuaries indicates an even higher

percentage will need LTC of some sort, whether in a

nursing home or other facility.

Probability of Needing LTC for First Time

Age Females Males

50 0.09% 0.05%

60 0.16% 0.11%

70 0.83% 0.54%

80 4.1% 3.1%

85 7.2% 6.2%

90 10.3% 9.8%

(Annual rates of incidence. Claims based on being unable to

perform at least 2 ADLs or severe cognitive impairment and

a 90-day elimination period.)

• The risk of requiring TLC at any given age between 50 and

70 is tiny.

• Most insurance claims in this age range are due to early-

onset Alzheimer’s disease rather than an inability to perform

two ADLs.

• The likelihood of a claim climbs steeply with age; by age 85,

there is an estimated 7.2% chance a woman will need LTC

assistance for the first time and slightly smaller probability for

a man.

Cumulative Probability that a 55-Year Old will need LTC

By Age Females Males

60 0.6% 0.44%

70 4.2% 2.7%

80 20.3% 13.7%

85 35.3% 25.5%

90 49.5% 37.4%

By age 90:

(a) most of us will not live past age 90 and

(b) even if we do and need LTC, the length of time

in a LTC facility will tend to be fairly short.

• Overall then, the probabilities of requiring LTC for

any meaningful length of time are about 50% for

women and 40% for men.

• Of course, the probability you will need LTC will

be higher or lower depending on your genes and

lifestyle.

How Long is LTC Usually Required?

• A major study by the Society of Actuaries “Long-Term

Care Experience” indicates that only a small fraction

of cases last a very long time.

• It reported that about one-third of cases persist for 2

years or more and just one-fourth continue for 3

years or more.

Table below shows the percentage of LTC

cases that last 5 years or more, by age at the

time the LTC claim was first incurred.

The table is not saying that 15.05% of people age 55-64 will need LTC

but rather that the tiny fraction of people that age requiring LTC have a

15.05% chance of still requiring LTC 5 years later.

Likelihood that LTC Will Persist for 5 Years

Age when LTC

started

Still on LTC 5 years

later

55 - 64 15.05%

75 – 84 10.30%

90+ 3.80%

While a LTC situation is much more likely to arise

at very advanced ages, it is a less daunting

problem financially at those ages since the period

of LTC tends to be shorter.

Moreover, there is less reluctance to spend the

person’s remaining assets on LTC since they are

unlikely to need the money for any other purpose,

assuming there is no surviving spouse.

• From a financial standpoint, the primary concern is that

LTC will be needed from a fairly young age and last

many years.

• When assessing the risk, we need to be careful not to

combine a high probability of a LTC situation with the

expectation of a long duration, because it tends to be

one or the other, not both.

• Besides age, the other major factor in determining the

length of time one will spend in LTC is type of illness.

• Situations involving Alzheimer’s and other cognitive

impairment tend to last about twice as long as others.

About 10% of LTC cases due to Alzheimer’s will

persist for 6 years or longer.

• Cancer claims, on the other hand, tend to be fairly

short.

Preliminary Conclusions

• Costs aside, the most attractive LTC option to most

people is to remain in their home in their final years,

with round-the-clock care provided by outside

caregivers and with family members checking in

regularly.

• On a long-term basis, however, this will be too costly

and cause too much of a strain for all but the wealthiest

of families.

• Without imposing on family, the next best option

is a privately run retirement home with a total cost

of up to $100K per year.

• Keep in mind that care may be needed for 5

years for more.

• Over the long term, the probability of requiring LTC is

about 50% for women and 40% for men.

• The chances of requiring LTC that last for more than

5 years—perhaps the situation that frightens us the

most—are quite small.

Paying for Long Term Care

• Normally, when there is a chance of an event with

significant and potentially catastrophic financial

consequences, you want to insure against that event.

• If you have a young family, you buy life insurance, if

you own a home, you buy home insurance (fire).

Why not buy LTC insurance?

Typical LTC Insurance Contract

• Level annual premiums paid for life or up until a very

high age such as 100. The later you start, the higher

the premiums.

• For example, in one typical LTC insurance policy, the

annual premiums for a female are $3,740 if payment

and coverage starts at age 55 vs. $12,887 if payments

start at age 70.

more

• Coverage is subject to strict underwriting. You cannot

wait until you are on the verge of making a claim to

apply.

• Premiums are guaranteed not to increase in the first

5 years. Most policies do enable the insurer to raise

premiums unilaterally after the initial 5 years.


more

• If you discontinue premium payments, you lose

coverage and forfeit whatever premiums paid to

date.

• Further premiums waived if a valid claim made.

• Premiums are refunded if death occurs while policy

is in force.


more

• Benefits are generally paid out only if the person

needs constant supervision because of severe

cognitive impairment (e.g. dementia) or because the

cannot perform at least two activities of daily living

without substantial assistance.

• When a claim is approved, benefit payments start

after a waiting period, which is usually 90 days.


Does the Math Work? Example 1: Insurance Bought at Age 54 (based on an actual contract)

Pablo, a single person, buys LTC at age 54.

Annual premiums are $4,500 starting immediately and

continuing until age 100 or until death if earlier.

If Pablo eventually needs LTC and his condition meets

the terms of the contract, the benefit is a weekly payment

of $1,200 payable for up to 250 weeks (5 years).

Does the Math Work? Example 1: Insurance Bought at Age 54 (based on an actual contract)

more

• Assume, Pablo first claims LTC benefits at age 90.

• Premiums would stop but he would have paid a total of

$162K up to that point.

• Had he invested the same amounts in an investment

portfolio with an annual return of 4% after tax, that

would have grown to $356K by age 90.

more

Example 1: Insurance Bought at Age 54 (based on an actual contract)

• By comparison, the maximum benefit under that policy is

250 weekly payments totaling $300K.

• Keep in mind that $300K 36 years in the future is not

$300K in today’s dollars.

• He may find out at age 90 that he is still short of money.

more


• What if LTC is needed a lot sooner than at 90?

If a claim occurs at age 70 and weekly payments were

made for the max 250 weeks, then Pablo would have paid

$72K (or $100K at 4%) in premiums and received benefits

totaling $300K.

In this case the LTC would have paid off handsomely for an

early and substantial claim.


• Recall, the probability of LTC occurring between ages 55

and 70 is small (3 to 4%), and only a fraction of those

claims will last more than 2 or 3 years.

• The probability of significant claim occurring before age 70

is under 1%.


Note:

LTC benefits do not necessarily cover all costs in an early claim.

Additional expense would result if the situation lasts more than 5

years.

Thus, LTC insurance is helpful but would not eliminate the risk.


Based on premiums of $4,500 starting at age 54 and payouts of 250 weeks or

150 weeks of $1,200 a week. Value of premiums is accumulated with after-tax

interest of 4% a year.

LTC Insurance Premiums VS Payouts

Age at time

of claim

Value of

Premiums paid

Max of benefits

received

60 $30.5K $300K

70 $100K $300K

80 $203K $300K

90 $356K $300K

• The above table summarized the value of the premiums that would have been paid in this example vs. the maximum insurance payout at various ages.

• The value of the benefits received look attractive compared to the premiums paid up until age 80,

• even if we adjust the premiums for investment income they would have earned in Pablo’s hands.


Note:

• The maximum benefits are not always paid out.

• In fact, the average length of time in a LTC facility is

closer to 3 years than 5 years.

• If we replace $300k in the table with $180K, the case for

insurance is less compelling, even at earlier ages.


• Here we have an upper-middle income couple that is on

the verge of retirement and contemplating whether to buy

LTC insurance.

• The policy would cover both of them and would pay a

weekly benefit of $1,000 for an unlimited period.

Example 2: Bought at Age 61

Couple’s Financial Situation

Age (same for both) 61

Savings (in a tax-sheltered fund) $800K

Estimate retirement income needs for both* $65K a year

Income needs for 1 spouse if the other is in

LTC

$43K

Cost of LTC insurance for the couple

(until100)

$9K a year (at 61)

* Income needs excluding the cost of LTC insurance or comparable

self-insurance.

Now consider the need at two possible times.

• One (below), Maria needs LTC at age 71 and stays in a

facility for 7 years. Annual LTC cost is $100k at that point in

time.

• A claim of this size is not quite the worst-case scenario but it

would rank quite high among LTC claims in terms of total

costs.

• The LTC coverage they bought pays $50K of that annual cost,

which means the other $50K a year has to be covered by the

couple’s other finances.

Claim Occurs at Age 71

Insured Scenario Not Insured

LTC cost each year $100K $100K

Number of years 7 7

Total LTC cost $700K $700K

Less portion paid by

insurer

($350K) (Nil)

Less reduced normal

spending

($175K) ($175K)

Plus cost of insurance $112K Nil

Total amount paid by

couple

$287K $525K

• In the second case (below), Maria incurs a LTC claim at

age 86, which lasts until her death, 4 year later.

• This is more typical in terms of age when the LTC claim

occurs and also the duration.

• With inflation, we assume that annual LTC cost would

have climbed to $140K a year at that time.

• The following table shows that the couple are much

better off not to be insured, even though a claim of

reasonably lengthy duration occurred.

• Note that they might have difficulty getting the LTC

coverage at age 61 as only half of applicants that age

meet the underwriting requirements.

• At age 61 it may already be too late to get coverage.

Claim Occurs at Age 86

Insured Scenario Not Insured

LTC cost each year $140K $140K

Number of years 4 4

Total LTC cost $560K $560K

Less portion paid by insurer ($200K) (Nil)

Less reduced normal

spending

($124K) ($124K)

Plus cost of insurance $389K Nil

Total amount paid by couple $715K $436K

• From the above tables, the couple is on the hook for

significant expenses either way.

• If the remaining spouse downsized the home in the

event of a LTC claim, it could unlock enough equity to

fund the total LTC expenses even if not insured.

The Verdict

Insurance, whether home, life or for LTC, is most effective when

(a) the potential loss is easily understood and quantifiable;

(b) any losses over a given threshold would be fully reimbursed

by the insurance so you get peace of mind, and

(c) the cost of the insurance seems reasonable relative to the

coverage.

Does LTC insurance meets these criteria?

NO!more

First, the premiums seem high relative to the benefit

provided.

In the first example, the premiums were $4K a year

but the max lifetime benefit was only $300K.

more

Second, making LTC insurance premiums is a long-

term commitment.

Once you start to pay premiums, you practically have

no choice but to continue.

If you stop, there is no cash value.

more

Third, there is no guarantee that LTC insurance

premiums will not be unilaterally increased after 5 years.

In 2010, John Hancock raised premiums for most LTC

policyholders by 40%.

AIG, MetLife, and Lincoln National also requested

increases of between 10 and 40%.

more

Fourth, the size of an LTC claim is very unclear.

Maybe you need LTC for only a few months, with most

care provided by family members in your own home, so

that out-ot-pocket costs are almost nil.

Or maybe publicly funded LTC facilities in your area are

decent.

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Fifth, buying LTC insurance does NOT give you complete peace of mind.

There is no guarantee the entire cost is fully covered.

The need for LTC can easily continue well beyond the max number of weeks.

And if inflation is higher than expected, the promised benefits might be very inadequate.

more

Sixth, LTC premiums do not build up cash value like

whole life insurance would.

Seventh, LTC insurance entails a timing problem. LTC

insurance requires one to focus now on an issue that will

not be top of mind for many years. You need to consider

buying the insurance decades before a claim is likely to

occur.

more

Finally, you might just want coverage between ages 55

and 75, rather than lifetime coverage.

By ages say, 85 or 90 you would have had time to build a

side-fund to finance LTC.

Unfortunately, you cannot buy coverage that ends at age

75 and if you stopped paying premiums, you would be

overpaid a lot for the coverage received up to that point.

more

The product has not been very successful.

In the USA, LTC insurance currently pays for less than 10%

of all LTC delivered.

• The people that can afford it can also afford to tap into the

equity of their homes if necessary.

• Or they have other financial assets they can liquidated to

pay for LTC.

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What would be preferred is a policy with reasonable

premiums and a moderately high deductible that covers

all LTC costs no matter how long the duration of stay.

We have almost the opposite: high premiums that

provide first-dollar coverage but do not protect against

catastrophic loss.

Consider the following stats:

• More than half of us will never require LTC at all, and for

those that do, most will require LTC only for 2 or 3 years,

not ruinous for an upper-middle income household.

• For longer (more expensive stays) a woman has about a

5% chance of eventually requiring LTC for more than 5

years; for men, the probability is about 4%.


• If that 5% scenario if realized, there is a better than

50% chance that the LTC claimant will be the sole

surviving spouse by then, which means selling the

house to pay for LTC should be feasible.


The probability of an awkward situation:

A long stay in an LTC facility while the other spouse

is still living in the family home (which means it

cannot be sold) - is estimated to be less than 3%.

Alternatives to Buying Long Term Care?

With limited client funds to spend on insurance, life

insurance may be a better purchase:

• Whole Life

• Term

Whole Life: What is it?

Whole Life insurance is a type of permanent

insurance that has an investment component inside

the policy that grows on a tax-deferred basis (up to

certain limits).

• The death benefit as well as the investments and all

growth on the investments are received tax free by the

estate or their beneficiaries after the time of death,

• So if the investments are not withdrawn during one’s

lifetime, the tax deferral is a permanent tax savings.

Basic Guarantees

Typically Whole Life policyholders enjoy three great

benefits:

• Guaranteed premiums – meaning that the premiums will

never increase.

• Guaranteed whole life insurance – the basic life insurance

amount is guaranteed for life.

• Guaranteed cash values – accessibility to cash values.

Dividend Options

Typically policyholders can select from one of up to five

dividend options to meet their unique goals:

1. Cash payment

2. Accumulate at interest

3. Premium reduction

4. Purchase paid-up additions

5. Term insurance enhancements

6. Premium Offset (not addressed)

1) Cash Payment

Under this credit option, the annual credit is paid

directly to the policyholder.

2) Accumulate at Interest

• Under this credit option annual credits are left with the

insurance company to accumulate and earn interest much

like a savings account at a bank.

• The annual statement shows the amount accumulated as

well as the current annual credit. Generally, credits left to

accumulate can be withdrawn at any time.

• Interest earned in this account is taxable interest income

and is reported annually to the policyholder on a T5 income

tax form.

• Any withdrawal will not impact their initial insurance

protection.

• Upon death, any remaining accumulated dividends are

added to their death benefit and are paid tax-free to their

beneficiaries.

3) Premium reduction

• The annual credit is used to reduce the premium amount

payable.

• The policyholder is required to pay the remaining balance

outstanding.

• If the annual credit becomes larger than the premium due, the

premium will be paid in full.

• The remaining balance will be left to accumulate at interest or

may be applied under another credit option.

4) Purchase Paid-up Additions

• Under this credit option the annual credit each year is

used to purchase a single premium insurance amount.

• The amount of additional insurance coverage will depend

on the amount of annual credit, the age, sex, and

smoking status of the individual and the type of base

permanent policy.

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• The single premium insurance amount purchased

will have a gradually increasing cash value and will

itself generate annual credits.

• The cash value of the paid-up insurance is generally

available to the policyholder at any time.

more

• If this value is withdrawn in cash, the corresponding

amount of additional paid-up insurance is

surrendered.

• If all of the paid-up insurance is surrendered, only

the base coverage will remain.

more

5) Term insurance enhancements

a) One-year term to insure cash value

b) Enhancement options

Where do Dividends Come From?

• The premium the client pays is pooled with those from

other participating policies.

• The amount of premiums from the participating block of

policies that is not required to pay for current benefits and

expenses flows into the Participating Account and is then

invested to provide for future benefits.

Determining Dividends

Various components are considered in determining

dividends:

• The investment performance of the Participating Account.

• Death claims.

• Lapses, taxes, and other Expenses (associated with the

participating block).

Improvements in some of the components can help to offset

declines in other components.

Dividends are

NOT

Guaranteed!

• They may increase or decrease depending on the life

insurance company’s actual experience with investment

earnings, mortality, expenses (including taxes), lapses,

and other factors.

Cash Values: Accessing them?

Total Cash Values of the policy are made up of guaranteed

cash value, as well as non-guaranteed cash values.

This can typically be accessed through either:

1. Policy Loans

2. Borrow against the CSV

3. Withdrawals

1) Policy Loans

Typically an easy way to access the cash value of one’s

policy. The policyholder can usually request at any time as

long as there is enough total cash value.

• Often a variable interest rate is charged on the amount

borrowed.

• If the client does not repay the policy loan, the

outstanding loan balance will be deducted from the total

death benefit of the policy.

2) Borrow against the CSV

Most financial institutions will allow the policyholder to

borrow against the cash surrender value.

• The loan proceeds will be received tax free, although

interest must be paid on the amount borrowed (and the

interest will not be deductible unless the client is using

the loan proceeds for the purpose of earning income).

3) Withdrawals

The cash value can also be accessed through a

withdrawal, if the client has selected paid-up additional

insurance or dividends on deposit as his/her dividend

choice.

a) Paid-up addition insurance

b) Dividends on deposit

a) Paid-up addition insurance

The paid-up additional insurance that was purchased by the

client as a result of the dividends credited has a cash value

associated with it.

• Surrendering the paid-up additional insurance allows the

client to access this cash value.

• When the client takes a withdrawal, both the total cash

value and the total death benefit will be reduced.

• The death benefit is reduced by more than the cash

value.

• This is because of every dollar of dividend credited

or premium benefit payment made, several dollars

of paid-up additional insurance is purchased.

• On the other hand, the cash value increases by an

amount closer to the dividend paid.

Tax Implications

• Whole Life policies are usually considered exempt

life insurance policies under the Income Tax Act.

• This means that cash values grow within the policy

on a tax-preferred basis (within limits).

Are Dividends Taxable?

It depends on which dividend option is chosen.

Paid-up Additions and Enhanced Option

If dividends are used to buy addition insurance through

the “Paid-Up Additions”

or

“Enhanced” dividend options, then they are not taxable.

Taxation on insurance disposition?

• Surrender of part or all of you life insurance, and

policy loans are considered as dispositions for

income tax purposes.

• Both transactions may be subject to income tax (this

will depend on the ACB).

• For a policy loan, a taxable disposition will occur

when the policy loan exceeds the ACB of the policy.

• For a cash withdrawal, a taxable disposition will occur

when the cash surrender value exceeds the ACB of the

policy.

• The taxable amount is prorated based on the amount

withdrawn.

• The tax payable on the taxable portion of the policy loan

or withdrawal is based on the client’s marginal tax rate.

Paid-up Additions

• With this option their life insurance protection

increases – their premiums don’t!

• Their annual dividends are used to purchase

additional permanent insurance which is added

to their initial insurance amount.

• Over time their initial insurance amount could

eventually double, triple or grow even more!

• Once the death benefit increases it can never

decrease regardless of changing market

conditions.

• Issue Ages: 0-80

• Policy Size:

• Minimum $10,000

• Maximum $10,000,000

• Maximum volume for Juvenile (ages 0 to 17) is $1,000,000

Wawanesa Life’s

Pay to Age 100 & 20-Pay Whole Life

Paid-up Additional Insurance

• Premiums: Guaranteed

• Guaranteed Cash Surrender Values:

• Develops as early as year 5

Wawanesa Life’sPay to Age 100 & 20-Pay Whole Life

• Policy Loans:

• Maximum Loan Amount equal to cash value less:

• one year of interest and

• any indebtedness under the policy


• Available Riders:

• Term Riders

• Accidental Death

• Life Insurance Disability of Premium

• Policy Owner Disability of Premium

• Child Protection Rider

• Death or Disability of Premium Benefit


Conclusion

Although the incidences of illnesses requiring long-term

care will continues to rise as the population ages, the

purchase of long-term care insurance may not be the best

option for a client on a budget.

For clients under the age of 75, the likelihood of an illness

requiring long-term care for a prolonged period of time (the

one’s to be concerned about) is relatively small.

For limited client dollars, the client may be better off saving for retirement (which could include funding for long-term care), paying off their mortgage, or increasing their purchases of other insurance such as Whole Life or Term Life insurance, Disability Insurance or Critical Illness Insurance.

For an older client it is also very possible that she/he is the surviving spouse and then she/he might be able to sell the family home to fund long-term care.

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