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TRANSCRIPT
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.
Typical LTC Insurance Contract
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.
Typical LTC Insurance Contract
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.
Typical LTC Insurance Contract
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
Example 1: Insurance Bought at Age 54 (based on an actual contract)
• 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.
Example 1: Insurance Bought at Age 54 (based on an actual contract)
• 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%.
Example 1: Insurance Bought at Age 54 (based on an actual contract)
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.
Example 1: Insurance Bought at Age 54 (based on an actual contract)
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.
Example 1: Insurance Bought at Age 54 (based on an actual contract)
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.
Example 1: Insurance Bought at Age 54 (based on an actual contract)
• 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.
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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.
more
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%.
Consider the following stats:
• 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.
Consider the following stats:
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.
more
• 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
Wawanesa Life’sPay to Age 100 & 20-Pay Whole Life
• 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
Wawanesa Life’sPay to Age 100 & 20-Pay Whole Life
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.