Our health rarely improves with age. After the age of 65, 41 per cent of Canadians are likely to use nursing homes or some type of home care. Usually, the last five years of an individual's life will make up 50 per cent of their total health care cost spent during their entire lifetime, according to the Canadian Institute for Health Information.
Traditional financial planning as it has been sold to the public encourages Canadians to save enough personal capital to generate 65 per cent to 75 per cent of their pre-retirement income during their retirement.
This rule of thumb operates under the premise that when an individual retires their expenses will be less than when they were working. The principle behind this type of thinking is that by that point in time, those retiring are likely to have paid down their mortgage on their homes, they are no longer responsible for their children's post-secondary education and they have enough money to spend on vacations and other luxury items.
However, this type of thinking has proven to be based more on myth than reality. People are living longer today than ever before and this will impact their ability to provide for themselves as they age.
The cost of long-term care can cause post-retirement living costs for many retirees to be greater than when they were working. This cost reality of old age can quickly eat away at one's retirement nest egg.
Many Canadians believe the government will look after them in there old age. If they become chronically disabled or mentally impaired, their provincial government plan may cover only a portion of their care of the assistance and supervision they may need. Each province subsidizes long-term care to a different degree. In many instances, long-term care is not necessarily medical care as outlined in the Canadian Health Care Act, but custodial care.
Canadians will pay more longterm care costs out of their pockets, with ability to pay usually based solely on monthly income from pensions and investments. Thus, considering the already high costs of living and health care today, most Canadians may not be able to afford the full cost of their care in the future.
If a person is over 40 years old and has assets to protect, but is not wealthy enough to comfortably pay for long-term care out of savings, they should consider purchasing long-term care insurance as part of their risk management strategy in their financial plan. This is especially important if there is a history of serious illness and longevity in their family.
Long-term care insurance is another coverage that is rapidly growing in popularity. Long-term care insurance pays a daily or monthly benefit for medical or custodial care received in a nursing facility, in a hospital, or at home.
It is very important to apply for long-term insurance while you are still healthy. These policies are usually guaranteed renewable, meaning once you qualify, you'll remain eligible as long as the premiums are paid.
The premiums are based on a person's age at the time they purchase the insurance and rates are usually locked-in for the life of the policy. Since most premiums for this type of insurance are paid with after-tax dollars, the long-term care insurance benefits are tax-free.
When choosing a long-term care insurance policy, it is important to find a policy that allows customized coverage. Some of the options one may purchase in their personal policies are:
- Location of care: in-home, in a nursing home, in an adult day centre, or an assisted living facility.
- Type of care: skilled nursing care, custodial care, home health aides.
- Options for size of daily benefit and length of coverage.
- Flexibility in applying benefits (sometimes called, “alternate plan of care”).
- Choice of waiting periods before coverage begins.
- Coverage of organic mental illness, such as Alzheimer's.
- Benefit inflation indexing.
In essence, owning long-term care insurance can take away the financial insecurity that may accompany old age. By planning one's future today, it is indeed possible to have nothing to worry about financially during old age.