June 27, 2013
Title: Planning for long-term care
Subtitle: Financial cooperative advisors are increasingly recognizing the importance of including long-term care insurance coverage into client financial plans.
Financial services cooperatives have made considerable progress in increasing awareness of how lengthening life-spans are affecting retirements. True, many Canadians, particularly boomers, have delayed implementing savings plans for so long, that they will have to remain in the workforce longer than originally thought. “Freedom 55” is now widely regarded as a joke. But at least the subject is now on the radar.
Yet just as boomers are starting to seriously prepare, another realization is hitting: retirement years, which could run three or four decades won’t all be healthy ones. Many seniors will thus also need long-term care services, ranging from assistance in the home, to full-care for those who get afflicted with debilitating diseases such as Alzheimer’s, Parkinson’s and cancer.
Credit unions are gearing up to help them meet those challenges.
“There is an increasing realization that long-term care insurance is going to have to be a part of any complete long-term financial plan,” says Nathalie Tremblay, a health insurance product manager at Desjardins Financial Security, which is part of Desjardins Group, Canada’s largest financial services cooperative. “The few Canadians that do think about death imagine that it comes instantaneously. They don’t realize that many will also go through considerable periods of frailty. Those who recognize this in advance will have a significantly higher quality of life in their later years.”
A recent RBC Wealth Management report titled Mind the Gap cites Statistics Canada data which show that healthy life expectancy is considerably shorter than actual life expectancy. Women and men can expect to live on average 83.6 and 78.9 years respectively, but their Health Adjusted Life Expectancy (HALE) is just 72.1 and 69.6 years. “That means on average Canadian men and women will continue to live between nine and 11 years past the time when they are healthy,” says the report.
Not surprisingly, few baby-boomers, - a generation which until recently, appears to have expected that retirement funding will materialize out of thin air, - have given long-term care even a moment’s thought. According to a poll of Canadians aged 60 and over conducted by Leger Marketing more than two-thirds of those surveyed (67%) have no financial plan to cover the costs of ongoing care and 56% are unfamiliar with the costs of long-term care in their province.
“Canadians need to be realistic about what assistance will be available to them,” says Stephen Frank, vice-president (policy development and health) at the Canadian Life and Health Insurance Association (CLHIA). “There is a large gap with respect to what governments have committed to and what the likely need will be.”
A massive financing shortfall
Frank isn’t kidding. According to the CLHIA Report on Long-Term Care Policy, which came out last year, it will cost $1.2 trillion (in current dollars) to fund long-term care costs in Canada over the next 35 years. However governments are only expected to finance $595 billion (about half). That leaves a massive $590 billion shortfall, equal to just about as much (95%) as Canadians currently have invested in individual retirement savings plans. The bottom line is that many Canadians, particularly boomers, who are starting to retire in droves, will be facing large financial challenges related to their long-term care needs, which credit unions will need to scramble to help them meet.
These challenges start with defining just what long-term care is. The Canada Health Act slots these services in the “extended care,” category, which means that customers are responsible for paying either part or all of the cost. Complicating things further is the fact that health is a provincial jurisdiction, which means that Canadians face 13 different sets of rules, based on which province or territory they live in. “Support offered for continuing care programs varies greatly in terms of eligibility, scope and user fees,” acknowledges the CLHIA report.
According to a spokesperson for QTrade Financial Group which provides Desjardins, Manulife and Sun Life insurance products to credit unions, member coverage can range from care by a certified nurse, personal care in the home to help with daily activities such as dressing, cooking, bathing and the like as well as rehabilitation and therapy.
An incentive for provinces to push costs to individuals
The rising cost of these and other services is increasing the need for Canadians to get appropriate coverage. The North East Ontario Local Health Integration Network calculates that the average daily cost of a hospital bed, long-term care bed and home care are $842, $126 and $42 respectively.
Worse, rising costs are giving provinces a huge incentive to push patients out of hospital beds (which the public sector funds) into long-term care facilities or into their homes (which individuals and insurance companies pay for). A previous health care budget tightening episode in Quebec, in which the province emptied mental health facilities, resulted in many patients now living on the streets, provides an excellent example of where this can lead to. The threat exists that cash-strapped provincial governments could act the same way with hospital patients, by redefining their ailments, particularly those of patients on the margins.
The CLHIA report notes that as early as 2011 (the year that the first baby-boomers turned 65) 7,550 hospital beds, or roughly 7% of those in Canada, were taken up by individuals receiving long-term care. That number is set to explode during coming decades as the “bed in” baby-boom generation begins to give a whole new meaning to the term.
Credit unions struggle to react
That said credit unions are struggling to get Canadians to take the issue seriously. According to Tremblay, in-force premiums on long-term care insurance packages totaled a mere $106 million, a pittance compared to the $1.4 billion in premiums on the first year of life insurance packages in 2012. Desjardins’ long-term insurance products, which are sold directly in the credit cooperative’s Quebec branches and through Desjardins Financial Security Independent Network in the rest of Canada, account for 13 percent of those sales.
The Desjardins Independent Living long-term care insurance plans provide monthly tax-free payments to clients once the policy is “triggered.” This occurs either if the policyholder cannot continue to handle the activities required for daily living or his mental faculties become limited. Monthly payments can range between $1,000 and $9,000 depending on the amount of coverage bought, which generally averages about $2000.
Making broad statements regarding credit unions’ reaction to clients’ growing need for long-term care protection isn’t easy, as the laws regulating the sale of insurance at the branch level also vary from province-to-province (just as health care legislation does). However trends in specific jurisdictions shed useful light on the range of possible responses.
According to Lorraine Wilson, a spokesperson for Vancity, the British Columbia-based credit union makes long-term care insurance available to clients through its wealth protection specialists (WPS) team. Long-term care is also increasingly becoming an important part of some of the broader insurance policies that the credit union markets. Half of Vancity’s branches are currently authorized to sell long-term care insurance products under “grandfather” legal provisions. Other branches refer their clients to Vancity Life Insurance Service, with business done either in the compliant branches or in members’ homes or places of work.
“We do a life needs analysis with members,” says Wilson. “The subject generally gets broached through a full analysis or an insurance review. Long-term care is a product that fills a specific need. Many innovations (such as a long-term care provision within a critical illness policy) have had long-term care or similar type of benefits added to them.”
Ontario-based the Co-operators for its part markets critical illness products, which alleviate some long-term care risks, to credit union clienteles through its CUMIS Group Limited division by means of a partnering arrangement. According to Leonard Sharman, a spokesperson, life (including long-term care), home and auto insurance are sold in credit unions by staff of managing general agents (MGAs). “Our advisors conduct one-on-one consultations with clients to recommend investment strategies that suit their needs,” says Sharman. “A proper financial plan will include consideration of insurance products as well as investments.”
Much work left to do
In short, the general consensus among credit union professionals is that there is a lot of work left to do on the long-term care insurance front. According to Tremblay, much of it relates to training financial advisors how to broach the subject with clients. “It is a very sensitive topic,” says Tremblay. “Nobody wants to even think about the prospect of requiring long-term care. Let alone talk about. People assume that they are invulnerable. It is only when they turn around 50 or so that they start to become receptive of the idea.”
The Canadian Life and Health Insurance Association for its part believes that government can play an important role in helping increase public recognition and preparedness to fund long-term care costs. Among its more interesting recommendations is a proposal related to the introduction of an RESP-type model in which Canadians could set up private savings plans to fund these costs, to which the federal government would also contribute.
That said, building recognition among Canadians regarding the importance of preparing to meet their long-term care needs during retirement is a process that will likely take years to unfold. To be realistic, few advisors, who have so many other products that they can market, are going to be enthusiastic about promoting long-term care insurance to clients until the ground is prepared by educators, marketing campaigns and the like. That’s particularly true of advisors whose clients are not yet fully insured or who don’t already have adequately funded retirement plans.
Until those developments unfold, in many cases, advisors’ most effective strategy will be to start by encouraging clients to meet their basic retirement and insurance needs. Then only later, as client contributions to these initial plans become steady, will they begin broaching the subject of long-term care.
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