Long-Term Care Insurance: Because Dying Slowly can be Costly

An Introduction to Insurance and Risk Management – Part 5

One of my daughters gave me a subscription to Audible, the audio book company, for Christmas 2018. Among the first books I listened to was Thinking in Bets, by Annie Duke. The book highlights making decisions in the face of uncertainty, the kind of thing she had to do all the time when she was a professional poker player. The word that sticks with me from listening to Ms. Duke is probability. Very few outcomes are known with certainty, so we need to think in terms of probabilities, the likelihood of an event occurring.


One thing that is known with certainty is that we will die. The problem is we don’t know when we will die or how long the dying process will take. In that uncertainty lies risk.


The Purpose of Long-Term Care Insurance

Long-term care covers a range of services that people may receive as their ability to care for themselves declines. Examples range from in-home care to independent living at a retirement home to nursing homes that provide 24-hour nursing support for complex medical needs such as advanced dementia.


Paying for these services is where the financial risk enters the picture. While your provincial government will cover basic costs, anything “extra” will be on you to cover yourself. Options include selling off your investments, selling your home, relying on your children to cover the costs, or relying on government benefits. Another option is to buy a long-term care insurance policy.


Long-term care insurance typically provides for a stated monthly amount with a lifetime maximum. As is usually the case, depending on the insurer, you may have coverage for in-home care, or the insurance may only cover expenses for services provided in a licensed nursing home. Given the increasing costs of health care you may also want to include inflation protection in the policy.


Premiums vary according to age, as one might expect. Someone in their 40s, for whom the probability of needing the insurance is low, is going to pay a much lower premium than someone in their 70s. However, even if you purchase a long-term care policy while you are relatively youthful, the insurance company may still raise the premiums as you age and the likelihood of needing long-term care increases.


Is Long-Term Care Insurance Worth It?

We routinely hear that health care costs borne by provincial governments across the country – and paid for by our taxes – are increasing at a pace well above the rate of inflation. Mandates from electors to rein in spending mean that governments may choose to limit coverage for long-term care, which suggests that we may have to shoulder more of the burden for such services ourselves. But what are the odds?


A Globe and Mail article by Augusta Dwyer, last updated in 2018, suggested that most people (74%) have not planned for the expenses associated with long-term care. But maybe that isn’t such a bad statistic, after all. A representative from the Canadian Life and Health Insurance Association observed that the probability of needing long-term care is at only about 17 percent. Said another way, 83 percent of the time, you will not need long-term care. Does that risk warrant buying a potentially expensive insurance policy?


Each person is different. Are you able to afford the premiums? Or, on the other hand, do you have sufficient savings that you could cover the associated expenses without significantly impacting your lifestyle? Given the relatively low likelihood of needing such insurance, maybe the compromise choice is to buy insurance that only funds a portion of the anticipated expenses.


Another factor to consider is the average length of stay in a long-term care facility. According to another Globe and Mail article, this one by Alexandra MacQueen, and last updated in 2017, the typical stay in a long-term facility is about 18 months. This article, by the way, includes a calculator for estimating long-term care costs.


The Bottom Line?

If only it were that easy. The choice to purchase long-term care insurance remains with the individual, ideally in consultation with the family. It is a question of probabilities. Which makes more sense? Offload (a portion of) the risk to an insurance company, albeit at a not insignificant cost? Or, retain the risk on the assumption that, on balance, this is more economically sensible? It is a choice we should at least consider.


In my next post, I will consider Segregated Funds.


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.


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