Financial Planning

Insuring seniors is costly!!

INSURING SENIORS IS COSTLY, BUT IT’S WORTH IT!

It’s a well understood truth that the best deal on life insurance can be had when the client is young and in relatively good health. But just because the premiums on seniors are much higher, the need for insurance in your golden years may still be a good deal.

There’s no shortage of worst case scenarios, ranging from larger-than-expected tax liabilities to the failure of a pension plan.

Adapted from an article written by Al Emid that appeared in ADVISOR.CA on March 14, 2011. This discussion has been modified and amended to address a public audience.

Even good news can conspire against the client: with longer life expectancies and earlier retirements, there is a higher likelihood that medical and living expenses will consume retirement assets.

At the same time, it has become more common – even socially acceptable – to carry debt into retirement. A Harris-Decima poll last August for CIBC found that only 35% of Canadians in the 55 to 64 year age group are debt-free and that 8% of respondents believe they will be in their 70’s before clearing their debts. Another 10% have no hope of ever becoming debt free.

In today’s environment – not like our parents‘ environment – there are a lot of people retiring with a mortgage or perhaps a long line of credit or they’ve signed for their kids to get their houses. There are a lot of reasons for seniors to be worried. They don’t have a debt free environment anymore.

Another common problem is that estates of baby boomers may face unexpectedly high tax bills. In the stereotypical scenario, parents bequeath the family cottage to their children, along with a massive capital gain, thanks to soaring vacation property values.

Some aim to shield beneficiaries from their debt. They want to make sure that debt is paid off when they pass away.

Carrying debt to the grave and unexpected tax bills illustrate the importance of term and permanent insurance in a senior’s protection portfolio.

Not all insurers provide coverage at the top of the age brackets, however. This can affect the availability of insurers with whom to write contracts.

Tracking differences can be a challenge, as well, since there are over 2,400 life insurance products and variations available in the Canadian market.

In the term insurance category, some insurers will not underwrite policies after the individual turns 65. Many will, however, renew term coverage up to 85 years of age when the policy ends, and a rare few will renew term coverage up to age 100.

Renewal costs on a term policy average four times the original premium – for those with additional risk factors, like tobacco use, that can rise to six times the original premium.

If the insured individual has remained in good health, a broker may be able to get an entirely new policy for a client at a lower cost than the renewal cost.

Applicants that are still in good health can look at applying for a new term 10 (T10) with medical evidence, rather than just letting the (existing) policy renew on its own, but this process should be concluded before the old policy lapses.

Changing policies, however, means exposure to a new two-year term of incontestability and the suicide exclusion.

In the permanent insurance category, underwriting age limits vary between companies and product lines.

The number of companies providing term 100 (T100) coverage has decreased in recent years and some companies that currently offer it are expected to drop it from their line-up, since underlying costs have proven higher than originally calculated.

To a senior who is already concerned about his/her debt purchasing life insurance coverage might be a difficult concept to come to terms with, but when the effect that debt and taxes can have on an estate is considered it can be a welcome strategy to consider.

People should also be reminded that survivor benefits on some pension plans provide only 60% of the original payment to the surviving spouse after the plan-holder deceases.

Given that the end beneficiaries of the life insurance policy are often the senior insured’s adult children, it might make sense for them (the children) to purchase the policy on the lives of their parents, to shield their inheritances on their parents’ deaths. In this fashion the children would own the policy. They would have the ability to use it to pay the taxes or keep the cottage.

THE CASE FOR “LONG TERM CARE” INSURANCE

THE CASE FOR LONG-TERM CARE

A personal story . . .

Ten years ago, at the age of 75, D.B’s. mother-in-law was diagnosed with Alzheimer’s and has since lost her ability to speak. For the past seven years she has lived in a chronic long-term care facility in Toronto. She is in a semi-private room and has a special attendant who visits her daily to help her dress and eat. When D.B. and his wife go out of town they arrange for additional medical professionals to be on call in case she has to be taken to the hospital. This care and attention provides his mother-in-law with the dignity she deserves and us with peace of mind.

This care costs D.B’s. mother-in-law $50,000 a year. She and D.B’s. late father-in-law did save for their old age—but they didn’t invest in long-term care insurance (LTC) simply because it was not available and even if it were, she would not have qualified.

Because people in long-term care facilities live longer, they face a higher chance of outliving their money. Even if D.B’s. mother-in-law’s savings do run out, D.B’s. family will continue to provide financially so that she will always receive the same level of care. But not all families are in the financial position to cover such costs. That is where LTC comes in. LTC provides an option to those who do not have savings and the financial ability to provide care at a level that is appropriate. The government funds basic long-term care but LTC allows people to upgrade their service beyond the government minimum levels.

All for LTC and LTC for all
The fact is people are living longer. Whether at home or in an institution, many of us will someday need help with the ordinary, daily tasks for an extended period of time. The bigger point, though, is LTC is not just an issue for the old and frail. Head injuries, strokes, paralysis from accidents and spinal injuries can occur at any age and no one is immune.

People are not rushing to buy LTC, however, because they are understandably in denial. They feel they are too young, too old, too healthy or too unhealthy to need LTC. They believe the government will provide adequate funding. They do not understand what is at stake. LTC should be considered by anyone who wants to protect his or her assets, avoid relying on government-funded facilities or choose their preferred form of healthcare assistance.

LTC is a tough sell in the financial planning business. It is both an expensive product and a disturbing topic. It is, in fact, a product that is still purchased infrequently. Ask yourself, though, if you know of a relative or friend living in a care facility or receiving care at home – and you probably do.

We recommend people consider the cost for long-term care, because it varies widely. People can easily face monthly costs ranging from $3,000 to $7,000, just for facility charges. Costs can double if a parent or spouse still lives at home while his or her spouse is in a facility.

Throughout her life, B.D’s. mother-in-law supported and tended to her family. Now in her time of need, B.D. and his wife will spare no expense to ensure she has excellent care and dignity. Long-term care insurance is not available, simply because we may wish it. We have to qualify to have contracts issued. It should be considered as an integral feature of our comprehensive planning.

A research story . . .
(May 31, 2005) Changing demographics will have a long-term effect on societal practices, experts say, and must be properly understood.
Demographics are “…one of the more important aspects of retirement planning,” argued Carl Haub, senior demographer at the Washington, D.C.-based Population Research Bureau during a recent National Press Foundation meeting, also held in Washington.
Haub defined demographics as the study of a population’s age structure, especially the relationship between age groups and their growth or shrinkage. A constant structure of young, middle-aged and senior citizens ensures that needs remain constant as long as the number of individuals also remains unchanged.
In a retirement planning context, constant structure means that the proportion of income-earning individuals “paying into the system” relative to youths and seniors remains steady and predictable. A bulge in the age structure produces increased tax money coming into government coffers — with an accompanying increase in services demanded while a contraction causes a decrease in incoming funds.
Currently, the most important demographic issue centers, perhaps not surprisingly, around baby boomers. “Every trend you can imagine is ascribed to the baby boom,” Haub said, defining it as a post-depression boom instead of the more frequent characterization as a post Second World War boom.
Haub believes the boomer trend peaked in the early 1960s. The fertility rate declined in the next decade, with many couples concluding that two incomes were necessary, he said. The American fertility rate fell to 1.7 children per couple but then stabilized at two by 1990, meaning that population stays constant except for the effects of immigration and longer life expectancies. The Canadian rate is estimated at around 1.5.
That equation, when combined with other projections, leads to the bureau’s estimate of an older and expanding Canadian population in the future, bringing with it many implications.
As the population ages, we will increasingly face problems that accompany advancing years, suggests Nathalie Tremblay, health products manager at Desjardins Financial Security. For example, a recent Desjardins-sponsored study undertaken by Toronto-based Baycrest Centre for Geriatric Care indicates that one in three individuals over 85 years of age suffers from dementia.
Increasing life expectancy and the prospect of dementia and other infirmities will become problematic given the shrinking family support systems triggered by the declining birth rate, she says. “Who will take care of them (when) you have 1.5 children per woman?”
That equation provides a compelling case for long-term care insurance. A long-term care insurance policy provides benefits for services needed when the insured individual is diagnosed with a debilitating illness or injury and can’t perform at least two activities of daily living, such as eating, bathing or dressing.
Eligible services can include health aid fees, home management, home-based hospice/palliative care, services of a nurse and nursing-home care.

Addendum . . .
Long-term care insurance contracts can be designed to make “return of premium” benefits available, and, in this fashion, be structured to comprise an integral element in a person’s investment portfolio.

This report is abridged and modified from a variety of original discussions published in the “ADVISORGROUP” series of publications, read by the associates at FB FINANCIAL & Associates.