THOUGHTS ON LTC PLAN DESIGNS AND ISSUES

I will be considering several issues which seem to be (or certainly should be) important to many people who are considering this product:

1. Income policies vs. Reimbursement policies
2. Lifetime payout vs. Limited Period payout policies
3. Lifetime premium payment vs. Limited premium payment policies
4. Optional features you should or should not consider adding

1.      Income vs. Reimbursement: I know there are many people who prefer the income model to the reimbursement model for several reasons:

·        It may be easier to collect benefits under the income model

·        There is no requirement for receipts – making it possibly easier to obtain lower cost but still qualified assistance

·        There are no rules about WHO can provide the help, as there usually are under the reimbursement model

·        Possibly other advantages as well – but these are the ones I hear most often.

BUT:

·        There is greater control of the benefits and the cost of coverage under the reimbursement model

·        There is at least a reduction in the possibility of elder abuse under the reimbursement model

2.      Lifetime vs. Limited Period payout policies (Limited Period payout policies include the “pool of money” approach because, although the pool may be large, it is NOT UNLIMITED):

·        There is no question that there is at least a psychological benefit to knowing that you cannot outlive your needs

BUT:

·        Remember it is not the eventual cost of care which may cause premiums to be increased (a concern of many people) but rather the DURATION of the care (well, also if care needs occur EARLIER than expected – but given any reasonable projection of what has been happening with aging and health – it is more likely that care will occur LATER on in life). It is the Lifetime benefit payment contracts which - in my opinion - are more likely to see increases in costs

3.      Lifetime premium payment vs. Limited premium payment policies:

·        Obviously budget is a significant factor here but the difference in the premium required for a 20-year period (for example) as opposed to the cost of the identical protection but with premiums payable for life is a very small PLUS. In some ways it may serve to lessen the potential impact of possible premium increases. Of course, once the limited pay period is over, there is no possibility of new charges. However, given Canadian demographics and the typical age for claims, a plan where premiums are only required to be paid for 20 years may significantly lessen the risk of any increases. First, the oldest boomers are today age 65. That gives us 11 years (data indicates that the average age of claim commencement is 76) until claims should really start to occur. Again – it has been regularly stated that the so-called “average claim” is 5 years in duration. That gives us at least 16 years (or 80% of that 20-year payment period) before claims COULD become longer than likely projected. When you also consider the fact that our industry claims to have learned from the American experience (where policies were both underpriced and too generously worded), plus the reluctance to increase premiums on the “in force” business (healthy clients will leave = worsening of the situation), I think we can project at least a reasonable possibility of no significant price increases.

4.      Which optional features should you consider? Which should you ignore?

·        First, which to IGNORE!

Ø       RETURN OF PREMIUM ON DEATH! Do not buy this! Even the carriers tell us to ignore it. Let me quickly show you why. I will use a hypothetical case of an annual premium of $1,000 – payable for 20 years. Structures vary somewhat, but in general the maximum death benefit payable on this policy will reach $20,000 after 20 years. Before that point, a lesser amount may be payable.  If you look at a 20-Pay Life Insurance  policy [premiums only payable for 20 years] (the premium structure is identical), the cost will either be the same or slightly less than the cost of the rider – AND THE FULL $20,000 IS PAYABLE FROM DAY ONE. Superior coverage at the same cost or less? That seems like a “no brainer” to me.

·        Next, which to CONSIDER:

Ø      (a) Guaranteed Insurability and (b) Cost of Living. In effect, these are two different approaches to the same issue. The fact is that costs of care will rise over time. If we use our neighbor to the south as an example, costs of health care have risen faster than the traditional CPI every year save one since these costs have been measured. I know of no reputable source who does not expect these costs to continue to rise over time. If this is the case, we may wish for our coverage to increase as well. There are two ways to offer this feature.

                                                                           i.      Under the Guaranteed Insurability approach, the insured has the right to request new coverage on specific dates without needing to provide proof of health. The complication with this approach is that every time you exercise an option, your premium increases. There is no question that the INITIAL premium is cheaper using this approach than using the Cost of Living approach but that price difference rapidly decreases and it can become significantly more expensive. Further, you must take action in order to benefit from these increases.

                                                                         ii.      Under the Cost of Living approach (as it is used by most carriers) the coverage increases every year on the anniversary date – whether or not you are on claim. The actual percentage increase varies depending on the company. The most important items to note here are that the increases are automatic AND THERE IS NO INCREASE IN COST. The cost of this feature is built into the initial premium you pay.

I STRONGLY SUGGEST PURCHASING AS MUCH COVERAGE AS YOU CAN REASONABLY AFFORD. THIS SHOULD BE YOUR FIRST CONSIDERATION. NEXT, MAKE SURE IT IS PROTECTED AGAINST INFLATION. AND ONLY THEN, IF YOU HAVE EXTRA PREMIUM TO COMMIT, LOOK AT LENGTHENING THE PAYMENT PERIOD.

Above all – talk to ALL Financial Services about the importance of Long Term Care Insurance.

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Back to the Basics (Part 2) Why should YOU consider Long Term Care Insurance?

The most effective way to address the above question is by asking a series of other questions:

1.      What is it that we want for our retirement?

2.      What is our definition of retirement? Will we stop working completely? Will we slow down? If we do continue to work, will it be a continuation of what we have always done or will it be something else?

3.      What do we want for ourselves? What do we want for our families and/or for those closest to us?

4.      What is our health like? Do we eat properly? Exercise regularly? Smoke?

5.      Is there longevity in our family?

I am going to address numbers 4 and 5 first because they can be answered quite quickly. If there is a history of longevity in your family, this whole topic is one that you should consider very seriously. If your parents lived to a ripe old age, you have a good chance of doing the same. Also, if you are healthy, exercise regularly (I am NOT saying you need to be an exercise fiend, but if you go for walks and are not a TOTAL couch potato), watch what you eat, and do not smoke, you are doing most or all of what doctors tell us will contribute to a long and healthy life. It is the person who has the longest, healthiest life who is most likely to need what this plan offers.

The remainder of the above questions brings us to the core of our topic. Answers may differ BUT I think it is safe to assume that we will want to enjoy this period of our lives. We will do whatever we choose, whatever we can, whatever our health and our financial position allow us to do. Frankly, the whole purpose of Long Term Care Insurance is to allow us to do EXACTLY THAT! It is the umbrella that protects us against a rainy day; the security against outliving our cash; the insurance against becoming a burden to the people we love. It allows us to stay in our homes for as long as possible or to CHOOSE where we will live should that become necessary.

Very few of us want to live in an “old persons’ home”. None of us want to be dependent on our spouse or our children. We want to enjoy our lives and live them the way we want – free of any pressure. That is what Long Term Care Insurance is for. It is designed to be there for you when you need it. The largest financial risks that seniors face are not market downturns or interest rate fluctuations, but are the medical and other costs which accompany longer lives. A male age 65 has 1 chance in 3 of needing care at some point in his life. A female age 65 has 1 chance in 2. It is up to A.L.L. Financial to help you find the right amount of protection at a cost that will fit your needs

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BACK TO THE BASICS!

WHY SHOULD EVERYONE BUT THE TRULY IMPOVERISHED PURCHASE LONG TERM CARE INSURANCE?

I guess the most simple and the most powerful answer to that question is that we are currently blessed with a long life and should enjoy that blessing for as long as possible. Two frequently asked questions include, “Will I have enough money to retire the way I wish to?” and “Will the money I have last long enough?”

Frankly, one way to be as certain as possible that our golden years will truly be what we wish them to be is by purchasing Long Term Care Insurance. I often describe this product as our protection against a rainy day. Given the length of our lives, the need for this protection is IMMENSE. A male now age 65 has 1 chance in 3 of needing care at some point in his life. A female now age 65? 1 chance in 2...

Why are we so likely to need care? Because we have learned to take such good care of ourselves. When I was in my 30s (in the mid-1970s), I remember hearing about people retiring and then soon after their retirement, reading their obituary. When I was growing up, almost everyone smoked; there were very few gyms in Montreal (basically school gyms and the various YM(&W)CA’s and the MAAA); and the term “Healthy eating” was yet to be invented. All this has changed.

Plus medical science has EXPLODED!

The three most powerful events in my lifetime?

1-     The fall of the Iron Curtain,

2-     The invention of the internet,

3-     The December 3, 1967 news of the world’s first heart transplant.

From that point on, it seemed that medicine could do almost anything. Our life expectancy has grown by leaps and bounds. I never knew my great-grandparents, the only one I ever even heard about died one year after my father’s birth. All of my grandparents were gone by the time I reached my mid-20s. My son is 32 and has met his maternal great-grandmother and had his maternal grandmother until June 6, 2011. I know a young lady who suspected that she was pregnant – had she been, her child would have had two great-great-grandmothers. Go to any shopping mall, gym, or anywhere really, and you will see many people in their 70s, 80s and even 90s. It is wonderful!

BUT

There is a negative side to this wonderful news. Because we live long lives, and because we take such good care of our health, we reach a point in our lives where the body we have taken such good care of begins to break down, Perhaps we develop Alzheimer’s or some other form of dementia, perhaps we experience physical deterioration where we can no longer do things we routinely did when we were young. I remember – and this is going back more than 50 years – that my grandparents had a special shower with 5 heads. One was at the normal position, two were at shoulder height, and the last two were at my hips. I asked my grandparents what this was for because they certainly did not need it. One of their mothers (I do not remember which) was somewhat crippled and unable to shower normally. When my grandparents were first married (around 1915) the mother lived with them, they had the shower built, and just never took it down. Back then, this was unusual. Today it is very common.

Do NOT look at Long Term Care Insurance as “Nursing Home Insurance”. The last numbers I saw stated that 85% of claims were paid at home. This is “Let You Stay At Home” insurance. This is “I Do Not Want to Be a Burden to My Kids” insurance. This is “Let Me be a Customer – NOT A PATIENT” insurance.

The average claim will pay you back more than 4 times what you pay in. Just adjust the “pay in” part to fit your budget.

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Long Term Care Insurance
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Critical Illness Insurance
Life Insurance
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LONG TERM CARE INSURANCE (LTC) – REDUCE THE FRUSTRATION

I regularly hear that it is difficult to obtain Long Term Care Insurance; actually, I hear this about all forms of Living Benefits. In fact, it is not that difficult to obtain, the process is just different. Our industry has done a pathetic job in training advisors on how to qualify their clients. Many clients who encounter difficulty qualifying for Life Insurance may actually be able to qualify for Long Term Care insurance. I was once asked by an insurance advisor who had had both cancer and a heart attack if he could qualify for Long Term Care Insurance. Subject to certain conditions, the answer was yes. The best advice that I can give, as either a client or a financial advisor, is to use the insurance company’s Pre-screening guide. I will even take it one step further and say that regardless of the product you are going to present, use the Pre-screening guide prepared by Desjardins Financial Security. Their guide is clear, simple, and complete. Of course, it is developed with Desjardins’ underwriting philosophy in mind, but it will give you a reasonable idea of what the other carriers may do.

I know it may seem obvious, however too many advisors seem to ignore the next point. If your client is already having trouble performing any of the following: Bathing, Dressing, Moving in/out of a bed or a chair, Toileting or bowel/bladder control, Eating, Taking Medications, Walking In/Outdoors, Using a Telephone, Managing Finances, Performing Housework, Doing the Laundry, Transportation, Shopping, or Meal Preparation he/she is uninsurable, and most likely eligible for benefits or very close to that point.

Equally, if your client requires a Walker, a Wheelchair, Oxygen, Dialysis, a Respirator, a Hospital Bed, a Quad Cane (4-pronged cane), or a Motorized Cart do not apply for LTC

Moving away from the obvious, the next points to consider are medication and height and weight. Verify which medications your client uses, both prescription and non-prescription, and compare them to the list in the guide. As far as height and weight are concerned, the tables are fairly liberal; however, if your client falls outside of these criteria, he/she will not qualify.

I will just give 3 examples:

• If you are 5’6”, you must weigh AT LEAST 102 pounds and NO MORE than 229 pounds.
• At 5’9”, the minimum is 111 pounds and the maximum is 246 pounds.
• At 6’, the minimum is 120 pounds and the maximum is 268 pounds.

Finally, carefully take your client through the list of medical conditions in the guide. These thirty minutes that you spend will significantly reduce the frustration for you and for your client.  Frankly, this last sentence expresses all you really need to do: “Invest a little bit of your time learning about these products and both you AND YOUR CLIENT will reap tremendous rewards.”

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
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LONG TERM CARE INSURANCE IS NOT EXPENSIVE - LONG TERM CARE IS!

When we present any form of Living Benefits, an almost automatic reaction is: “Oh my! That is EXPENSIVE!” We need to realize the benefits that will be provided in relation to the premium being charged and adjust the premium as needed to fit the client’s budget.

In the illustration that follows, I am using a female age 65 because females live longer than males, are more likely to use the protection, and their premiums are higher. Remember that males pay less and that if anyone purchases before age 65, the annual cost is lower AS IS THE TOTAL THAT YOU WILL PAY PRIOR TO CLAIMING. I have also deliberately chosen to use the most complete, and hence the most expensive, product in order to make my point as clear as possible.

I have also included the Inflation Protection feature because it is generally accepted that costs of care will increase rapidly over time. Of course, if you elect not to purchase that option, the cost will be lower, as will be the benefits received.

For the purpose of this illustration, the initial benefit is $3,000/month. This amount will increase every year by 2% compounded, however, the premiums will not increase.

Based on data from 2011, the average age of claim is 76 (a 65 year old should anticipate paying premiums for 11 years). A reasonable duration for claim payout is about 6 years. For purposes of my example, I will divide the claim into two equal parts: the first 3 years at home and the last 3 in a long-term care facility. While in a facility, benefit payments double.

Let us look at 2 options:

Option 1                                   Option 2

Premium (age 65)                                $826.73/month             $655.49/month

Paid in premiums over 11 years $109,128.36                            $86,524.68

Benefits paid out (over 6 years) $416,545                                 $395,961        

Residual (balance)                                $399,072                                 no residual

Option 1 would cost $826.73/month. This would create a total 11-year cost of $109,128.36. The total benefit payouts over the 6-year claim period would be $416,545 – or just under 4 times what was paid in. In addition, there would be an available balance of $399,072 to either continue payments for this claim or to use for any future claims.

Alternatively, if $826.73 is outside the client’s budget, there is option 2.

Option 2 would cost $655.49/month. This would create a total 11-year cost of $86,524.68. Payouts for the first 5 years of the claim would be identical to option 1. The only difference would be that benefits would run out after a total of $78,251 had been paid in year 6 and there would then be no balance. The total benefit payouts in this case would be $395,961 – still more than 4 times what was paid in.

The key number in all of this is the 4 times what was paid in. You choose the amount you are comfortable with in terms of benefits to be received and price to pay. Whatever that amount is, you can feel confident that you should receive significantly more in pay out than you will pay in.

THE HUGE BENEFITS OF NOT WAITING!

Over and above the fact that you will probably be healthier at age 55 than at age 65, let’s take a look at some more numbers:

Option 1                                   Option 2

Premium (age 55)                                $462.02/month                         $361.52/month

Benefits paid out (over 6 years)            $513,770                                 $482,679        

Residual (balance)                                $486,471                                 no residual

Rather than paying $826.73/month if you wait to 65, the cost for the identical initial benefit starting at age 55 is $462.02/month AND the payout over 6 years starting at age 76 is $513,770 – with a balance available of $486,471

Alternatively, what would cost $655.49/month at age 65 would cost $361.52 at age 55 AND the payout over 6 years would be $482,679

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“Patients needing home care out of luck as waiting list grows” (Montreal Gazette Thursday November 18, 2010)

This is why I constantly preach that Long Term Care is the largest financial issue facing Canadians. Look at the date on the article and you may realize that we are about 11 years away from the beginning of the problem. There are waiting lists now – what will they be like when the “boomers” start to need care – which usually begins after age 76? The oldest “boomer” is age 65 today – that means that we are 11 years from the start of the real crisis.

I think it is safe to say that few of us have a strong desire to move into a long term care facility. Most of us would prefer to stay at home for as long possible. If we have children who live nearby they will probably assist us as we age, however, we do not want to be a burden to them. What happens if we do not have children? What happens if they live far away? Even if they live around the corner, do we either want or expect them to give up their careers or their family life in order to help us? I suspect that few of us want that. We want to enjoy our time with them and we want them to be happy and to enjoy their own lives.

What do we want for ourselves? Remember – I am 45 days older than what is officially the oldest baby boomer, who was born on January 1, 1946. We value choice, independence, and control. We want to be customers not patients. Remember that Long Term Care Insurance is not “Nursing Home Insurance”. It is what may allow us to stay out of a Nursing Home.

I want to take this opportunity to address what seems to be a significant issue among advisors and possibly clients: the fact that premiums for Long Term Care Insurance are not guaranteed.

We have 3 choices:

1. Take our chances and hope that we never need help at home or elsewhere;
2. Save our money and hope that we have enough to look after ourselves;
3. Buy Long Term Care Insurance.

I will ignore the first option and look at the other two.

Case study: female age 65, who will need care for 5 years starting at age 76. Just to have a number to work from, let’s assume the care costs are $3,000/month. I will ignore inflation for ease of calculation, but in the real world, it is a significant issue.

“Save the Money”

In order to accumulate sufficient funds to cover the cost of care of $3,000/per month ($36,000 per year) I will need to save $163,654.22 in the next 11 years. In order to reach that objective I will need to put aside $10,685.81 (at a 5% interest rate) each year. 

Long Term Care Insurance

How much would insurance cost for the same case study? The answer here is $4,104 annually - about 60% less than the savings approach. Yes, insurance costs MAY go up, but this remains a far more reasonable approach than “saving for it”. Not to mention the whole issue of: “What happens if/when I find more interesting uses for my money?”

There is one other problem with the “save it yourself” approach. What happens if you need care earlier?

The people who are most likely to need this protection are those who look after themselves. If we exercise, watch what we eat, do not smoke, and generally take care of our health, our bodies build up a great deal of strength. The obese, the smokers, and the “couch potatoes” will not live as long and are less likely to need care.

Back in 3 weeks with more.

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The most important financial issue for the next 40 years

LONG TERM CARE INSURANCE

To me, long term care insurance is the most important financial issue of the next 40 years. My first objective is simply to alert you to the issue and to give you something to think about.

I am going to address two potentially significant areas of this topic and attempt to illustrate why I feel they are important.

The first item I want to look at is perhaps obvious, but we need to think about what has happened over the past 50 years and what the implications are for our future.

This starts/begins with truly good news. We are living much longer than we did only 50 years ago. When I was a teenager in the 1960’s we thought of someone age 65 as beginning to get old, someone age 70 as very old, and someone age 75 as probably dead. Forget the change in perspective due to turning 65 today. I defy anyone to consider someone age 65 as old today. The same goes for age 70. Age 75 is where age 65 was 50 years ago, just beginning to age. I had a 70 year old man walk into my office a few years ago – with his mother!  How many of my generation remember their great grandparents? I have a friend who thought she was pregnant; had she been, the baby would have had two great great grandmothers! Virtually everyone in my generation smoked, did not watch what we ate, and had sun tanning contests. If you exclude school gyms, I remember there being 3 gymnasiums in Montreal. I think we have a few more today!

The fastest growing segment of our population is the “over 85’s”. Our “retired” life is becoming almost as long as our “working life”. Further, our definition of “retirement” is different. Very few of us have as our objective to spend our life stretched out on a beach somewhere, enjoying a cocktail. To most of us, that sounds boring. Sure, we will do some of that; but we will stay active as well. We may change what we do; reduce the hours that we work; change our “job” - but we will continue doing things. That is what keeps us young. We walk, we go to the gym, we watch what we eat, and we have significantly cut our smoking. We are living longer and we are enjoying that very much.

However there have been changes in our lives as well. Divorce – which was a taboo in Canada (actually illegal until 1968) – has become common. Families no longer live as close together. I live in Montreal and I have one brother who lives in Perth Ontario and another in South Carolina. “Two income families” are routine today. The largest threat to everything that women have accomplished since the depression is looming ahead of us – either that or a major societal change. I am not getting into the issue of “right” or “wrong” here, but traditionally women have been the caregivers in our society. That may well have been OK when women did little work outside the home, but it sure will cause some issues today. What is the largest cause of employee absenteeism today? Eldercare. Today women spend more time looking after an aging parent or a relative than they do looking after their own children. Caregiving is stressful. On a scale of 1 to 10, most report it as being a 7 or an 8.

OK – this is where we are. I do not believe anyone can realistically deny these changes.

The second item can best be termed “denial”. Canada has had a government funded health system for many years and it is perhaps normal to feel that “The Government will look after us.”

In many cases, Canadians believe – and largely because of Medicare – that the “Government will take care of us.” Sorry, not in this case. Medicare covers only care whose primary objective is “curing you”. Long term care does not “cure”. It has never been part of health care in Canada and realistically never can be. Let’s start from the basics. Taxpayers provide the money which the governments use to provide services. I was born in 1945 and we had 42 taxpayers for every retired person. It would not have been a major problem to collect sufficient taxes in order to pay for the health needs of older Canadians. Today we have just under 3 taxpayers per retiree and that number will soon hit 2. There is no way that our governments will be able to charge sufficient taxes to pay the bills, plus the longer we live the higher the bill gets – and the “over 85” population is exploding.

A study was done in the United States. Parents were asked what they wanted most from retirement: “Independence; not disturbing our children’s lives or careers; not affecting our grandkids’ education.” They then asked the children of those parents the same question: “We will do anything for our parents. They raised us. We will give up careers, promotions, and our children’s’ education – anything for them.” Faced with those two choices, neither is correct. We know that we will do our best for our parents. We love them and we will do all that we can for them.

Let’s end this alert with just a few more numbers:

Health care costs (in Quebec):

• At age 55                      $3,431 per person.
• At age 65                      $6,237 per person.
• At age 75                      $11,224 per person.
• At age 85                      $21,372 per person.

The average cost of home care for Quebec seniors?

·         About $3,500 per month

Quebec spending on homecare:

·         Based on the most recent numbers – about $37 per year

.

Chances of needing care during your lifetime if you are now age 65 (like me):

·         33% if you are a male.

·         50% if you are a female

End of stats – back soon with a solution.

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Long Term Care Insurance
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Critical Illness Insurance
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