What are the risks long term care insurance deals with?

With the prevailing phenomena of

  • increasing longevity, even after serious illnesses,
  • smaller, more geographically dispersed families, where typically each able member has own duty outside the home,
  • government restrictions, partly forced and exacerbated by changing demographics,

more and more people will live for long periods of time while unable to take care of themselves. Basic daily tasks like bathing, eating, dressing, toileting, or moving around can be a problem, because of an illness, or just as a consequence of aging. Sometimes speech, physical, or other therapy has to be provided. Even if the person is physically fit, cognitive impairment comes frequently with age or as a consequence of certain illnesses; this also may necessitate the presence and help of a care giver. The help can be provided in the home, in an adult day care, a hospital, or in a nursing home. (For some facts about the prevalence and other characteristics of living in such facilities, click here.)

These services are expensive. A month in a nursing home may cost from $3,000 to $6,000, or the rate of a private registered nurse is about $30-40 per hour. An hour with a physiotherapist is about $70. For really affluent families, or individuals, these expenses may not mean a serious problem, but for the majority of people they do. Government assistance is limited in scope and choice, and is linked to the income level of the individual. This means that middle-income people cannot expect that they will be fully assisted financially if need for long term care arises. In Ontario, the consumer must contribute from $27 to $60 per day for care in a long term care facility. The average stay in such facilities is 2.8 years. People have to wait more than half a year on average for nursing home care. In private facilities, the monthly cost can be up to $4,800.

Some people prefer to be financially independent, and to have freedom in selecting what kind of personal service they get, where, and from whom. Others are concerned that long term care might drain too much, or even wipe out totally, their assets. This new type of insurance policy was planned with all these people in mind.

How long term care insurance addresses these challenges?

Long term care policies pay daily benefit if the insured cannot perform basic activities of daily living independently. The incapability, including intellectual decline, may result from any cause. This kind of protection is available for individuals aged 18-80, and the coverage will continue as long as the premium is paid.

With one policy, the premium paying period is 10 to 25 years, depending on age; moreover, if the policy is canceled after being in force for a certain time period, the coverage will not stop, but will be transformed to a paid-up policy with proportionally decreased benefit. With another policy, the owner can select any amount (in increments of $10) between $20 and $300 as a daily indemnity. In other words, the selected amount will be paid out, tax free, for every day when verifiably long term care was used, irrespective of the actual costs incurred. The policy also reimburses the cost of renting durable medical equipment, up to a limit, or provides payment toward the cost of installing and maintaining a communication system that can be used in case of emergency. Another company offers the selection of 'facility care only' or 'either facility or home care' options, as triggering conditions to benefit payment.

The benefit can be unlimited, or it can be maximized as 2,000, 1,000, or 750 times the daily benefit selected. Finally, the insured can decide whether the benefit will commence on the very first day of the future long term care, or only after 30, 60, 90, or 180 days. The premium will be, obviously, effected by these choices. The premium is level, and is according to the age when the policy commenced. There are some optional (or automatic) benefits and riders available, such as waiver of premium, inflation protection, coverage for family members, or return of premium at death. All these can play a role in finding the best option for any particular situation.

There are just a few companies yet offering this type of insurance in Canada. Fortunately, some of them offer long term care protection not just as a stand alone policy but also as a rider on universal life insurance. This is good news, since - because of the favourable taxation of investment gains within UL - it can actually decrease the cost of protection.

Another important development concerning long-term care needs is the inclusion of 'loss of independence' in some critical illness insurance policies. This kind of policy would pay a contracted lump sum (max. $2 million) 90 days after the insured has become unable to perform some basic self-care activities, due to either physical or mental impairment (but excluding mental and nervous disorders without a demonstrable organic cause). Another advantage of this combination of pure critical illness and long-term care coverages is that it is available from age 18.

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