Long-term Care Insurance and How it Works

Long-term care is a delicate subject. However, if you ever need it, you and your family may be glad you purchased long-term care insurance.

Statistically, once you reach the age of 65, you have a 50% chance of needing long-term care. Because long-term care costs are so high, you may not be able to afford them unless you dig into your life savings. The last thing you want to do in your golden years is worry about money or seek financial assistance from your children.

Long-term care insurance assures that this does not happen. It pays out money if you are unable to care for yourself due to old age, disease, or an accident.

Keep on reading to learn what long-term care insurance is and why it is worth considering.  

What is Long-Term Care Insurance?

Long-term care (LTC) insurance pays out money if you are unable to perform two or more activities of daily living due to aging, a chronic health condition, a disorder, or a disability. The majority of LTC plans reimburse you for long–term care costs that occur in a variety of places. These include: 

• a nursing home
• your personal home 
• adult daycare centers
• an assisted living residence

LTC plans provide income-style benefits. You and your family are free to use the benefit payments as you wish. Because you usually do not need to submit receipts to receive reimbursement, a long-term care policy gives you more control on how to spend the money, while helping protect your retirement savings. 

Many financial experts suggest shopping for a long-term care insurance plan once you are over the age of 60, or for couples, age 55+. If you wait until you already need long-term care, you will never qualify for insurance. Life insurance companies usually reject applicants who have an existing severe medical condition, such as Parkinson’s Disease. 

Also, if you put off buying long-term care coverage, it is possible you may not be approved based on your age. While the age limit varies by insurer, getting approved for a long-term care policy once you are over the age of 75 is unlikely. 

The cost of long-term care insurance increases with age, but buying it too early is not recommended, as most people only require care in old age. For applicants in relatively good health, the optimal age for purchasing coverage is between 60 and 65.

Couples, in contrast, may want to start shopping five years earlier to get the best combination of affordability and fewer dollars spent on premiums.   

Depending on your plan, you may receive benefits for a pre-defined time, such as one, two, or five years, or an unlimited period. LTC policies include a waiting or elimination period. This is a short period of time that you must wait after becoming eligible for benefits, before you can start receiving the cash payments. Typically, the waiting period is from 30 to 180 days. 

Cost of long-term care insurance

How much you pay for long-term care insurance depends on many factors, including: 

• Age: The long-term care premiums increase as you get older, with premium rates increasing substantially on a year-to-year basis after age 65. 
• Health: If you have health problems, you will pay more for long-term coverage than someone without pre-existing medical conditions. A debilitating health condition may even lead to application denial, especially if you are above 65.
• Gender: Women tend to live eight years longer than men and, as such, are likely to make more claims. As a result, premiums are higher for women than men.
• Marital status: Single people pay more for coverage than married people. 
• Coverage amount: The higher the daily benefit and lifetime benefit limits, the greater the cost of coverage. 
• Coverage period: Your insurance cost is directly related to the payout period. A policy that pays benefits for your entire lifetime will cost more than a plan with a one-year payout period. 
• Waiting period: Usually, the longer the waiting period, the lower the long-term care premiums.   

Who needs long- term care insurance? 

Approximately 50% of Canadians aged 65 and up will require some type of long-term care. So, in theory, long-term care insurance should be part of everyone's long-term financial strategy.

Long-term care expenses are not covered by your own health insurance coverage or Canadian public healthcare. You will have to pay for long-term care bills out of pocket if you do not purchase a long-term care insurance policy. With these costs in the hundreds (or thousands) of dollars per year, the question you should be asking is, "Can you fund long-term care bills without draining your savings?" ”

If the answer is no, you should consider long-term care insurance. 

How does it work? 

Long-term care insurance is a legally binding contract between you and the insurer. In return for monthly premiums, the provider promises to make regular cash payments if you meet your policy’s conditions for long- term care benefits.  

When you apply for long-term care coverage, you will be asked to answer some basic health-related questions. The insurance carrier may also request access to your medical records and a face-to-face interview. 

You choose the coverage amount and the payout period you want. Most LTC policies cap the amount you can receive per day and the total amount you can receive during the term of your policy. 

Once the policy is issued, you start paying premiums. You must pay them on time to keep your policy active. You will not receive any benefits if your policy is no longer in effect. 

Most LTC policies pay out when you can no longer do two or more activities of daily living (ADL) on your own. The Common ADLs include:

• eating 
• personal hygiene 
• dressing
• grooming
• maintaining continence (this includes the ability to physically use a bathroom)
• mobility (this includes the ability to get into or out of bed or a chair and move around without a walker).

Getting paid with long-term care insurance

When you file a claim, the insurer will go through the medical documents provided by your physician. They may also send a medical professional to review your health. If your claim is approved, you must pay for care from your own pocket for a pre-defined period, known as the waiting period, before the insurance company starts issuing benefit payments. The waiting period is usually 30, 60, 90, or 180 days. 

After the waiting period, your policy will pay up to your maximum daily limit, until the payout period expires or the maximum lifetime limit is reached. Generally speaking, you do not have to submit any receipts to receive cash payments. These policies pay cash benefits by the day, week, or month.  

Depending on the insurance company, you may have various options available to protect your LTC policy from future inflation. For example, one option is a 3% annual increase in the weekly benefit amount while the benefits are payable to help you keep pace with increasing healthcare costs. Another option is a 2% annual increase in the weekly benefit amount while the benefits are not payable and a 3% increase while the benefits are payable. You may also have the option to choose between simple and compounded inflation coverage. 

The inflation protection feature is optional, but one that is worth considering. If you do not take it, the weekly benefit amount will remain the same throughout the  term of the policy. As a result, what appears to be an adequate benefit today may be worth significantly less when you eventually file a claim. 

Mistakes to avoid when buying long term care insurance

When buying LTC insurance, here are some common mistakes you can avoid.

• Forgetting to take the waiting period into consideration: The waiting period refers to the short period of time that you must wait before benefits become payable. Since during this period you will have to cover care expenses out-of-pocket, make sure you choose a waiting period that best suits your budget. While a longer waiting period, say 180 days, can lead to slightly lower premiums, not everyone may have the financial wherewithal to bear long-term care expenses for six months. 

• Not understanding benefit limitations: Not all long- term care insurance plans pay benefits for an unlimited period. Also, most plans have a daily and lifetime limit. Make sure you know these details and understand how it may impact you in the event of long- term care needs before you sign the insurance contract. 

• Not knowing how long the premiums are guaranteed: Long term care insurance premiums can go up after you purchase the policy. Most insurers offer guaranteed level premiums on LTC plans for the first five years only. 

• Not looking at riders: Some of the common riders available with LTC plans include return of premium and cost of living adjustment (COLA) riders. While the latter increases your premiums to help offset inflation, the former returns part or all of the premium dollars to your beneficiary if there is no claim. Riders can help you customize coverage according to your specific needs, so they are worth looking at. 

• Not working with an independent insurance broker: An insurance broker represents you in the insurance-buying process and is legally and ethically bound to act in your best interest. Since they are not tied to any particular insurer, a broker can obtain multiple quotes and walk you through the pros and cons of each one so that you can pick coverage that best matches your needs and budget. Insurance agents, on the other hand, represent insurers — not you — in the buying process. As such, they are less likely to give you unbiased advice. 

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Companies that offer long-term care insurance in Canada

Formerly, many Canadian insurers sold dedicated long- term care insurance policies, however today only a handful of insurers — such as Blue Cross and My Dignity — offer these. Several other insurers, however, offer long term care coverage as a conversion option on their critical illness and disability insurance policies. These include Manulife and RBC Insurance, among others. 

Conclusion

Many Canadians aged 65 and up will require long-term care. However, you may be unable to pay the hefty costs of long-term care. Or they will have to use their retirement savings to pay for long-term care. Long-term care insurance, thankfully, can lessen the possibility of financial difficulties in old life.

Long-term care insurance covers the costs of custodial care, whether provided at home or in a nursing home or assisted living facility. You can enter your golden years with confidence if you have a long-term care insurance plan in place, knowing that your assets are secured against the high expenditures of long-term care. Speak with a Dundas Life expert to review your long-term care insurance requirements and determine the appropriate coverage for your unique scenario.

Frequently Asked Questions

Do I need long-term care insurance if I already have critical illness coverage?

Both long-term care and critical illness insurance provide some degree of protection against health problems in old age, but they are vastly different products. Long-term care insurance provides regular cash benefits if you need assistance to manage daily living. Critical illness insurance, in contrast, pays a lump-sum if you are diagnosed with a covered health condition. 

When it comes to insuring yourself against long-term care costs, long- term care insurance provides more extensive protection than critical illness insurance. Critical illness insurance will not  pay if you require long-term care due to a non-covered illness, and in many instances, policies last only until age 65 or 75. Therefore, even if you already have critical illness protection, you may still want to consider long- term care insurance. 

What does long- term care insurance cover?

A long- term care insurance policy provides an income-style benefit to help you cover the cost of care due to a disability, injury, or illness. You receive benefit payments for care received at:

• your home
• a nursing home
• an adult daycare facility
• an assisted living facility

Does one need to undergo a medical examination to qualify for long-term care insurance?

In most cases, you can buy long- term care coverage without a medical examination. However, the application process is likely to involve some health questions that you must answer to prove eligibility. Sometimes, the insurance carrier may also want to go through your medical records to accurately assess your insurability and set your premium rate. 

For how long does a long-term care insurance policy pay benefits? 

The payout period varies from one policy to the next. Some LTC plans pay benefits for one, two, three, four, or five years, while others pay benefits for your entire lifetime. 

When do benefits start? 

The benefits will start after the waiting period selected by you. Generally, the waiting period ranges from 30 to 180 days. 

What is not covered by long-term care insurance? 

Most long- term care insurance plans do not cover the following:

• alcohol addiction
• self-inflicted injuries
• injury or illness caused by an act of war.

All conditions and situations not covered by your policy will be clearly listed in the policy document.