WEALTH Matters — Winter 2010-2011

Case Study: Long Term Care Costs

While most of us plan to live independently for as long as we can, about 75% of Canadians over 65 will eventually need some type of assistance – either home care, a retirement home or long term care facility. Of those needing care, 92% of them will need help for about three years. Even the most basic facility charges close to $2000 per month for ward accommodation and closer to $3000 per month for a private room.


Of course, the amount of savings required to fund this future expense can be quite substantial. Some of our clients plan to sell the family home to fund these expenses. But if only one spouse needs care, they will have the cost of carrying the home plus the long term care expenses, or both will have to move. It also means there will be far less capital to leave to their children. Fortunately, there are options.

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What if they end up never needing long term care? They could include a ‘Return of Premium’ option in the policy to get their premiums back. In this case the premium is $390 per month – about it would cost to fund 3 years of long term care expenses out of their savings. But this option refunds all the premiums paid less the amount of any benefits paid. So if they don’t need the coverage, they get back everything they have paid into the policy.


Sadly, this coverage is much more expensive to start when you are older. By age 65 the total premium without the Return of Premium option is more than double what it costs at age 55. Also, the older you are the more likely you are to have some medical history which may make it impossible to get this coverage at all. So if this type of coverage interests you, don’t wait—call us soon to fund out how it would work for you.

If you are under 65 and healthy, Long Term Care Insurance is an excellent solution. John and Mary are 55 years old, in good health, and are planning to retire sometime before they are 65. A Long Term Care policy providing for $3000 per month for each of them would cost about $180 per month in premiums for life. While this may seem like a lot of money, consider what would happen if they invested this amount instead of buying the insurance.

Long Term Care Insurance

The table shows the total they would have accumulated by investing the same amount as the premiums for the insurance, assuming they can earn 5% annual interest before tax. By age 85 the premiums with interest would have accumulated about $101,000. This seems like a large sum until you consider that not even one and a half years of claims would exhaust the entire balance.

If Long Term Care insurance is not a viable option for you, and you end up needing long term care, a Reverse Mortgage may help. In this case the mortgage company (ie Canadian Home Income Plan) can provide a lump sum or monthly income to fund the long term care expenses until you are ready to sell your home.

Reverse Mortgages have not been popular with newspaper and magazine writers, but that is likely because these products are not well understood, and because working-age people are usually working hard to pay off their mortgage, and the idea of taking a new mortgage near the end of their lifetime seems strange.

However, this option may be much easier on someone than the pressure of selling the family home to raise capital. It can be especially useful when one spouse needs care and the other wants to stay in the home, preventing the sale of the home and the use of the proceeds to fund the long term care expenses. And mathematically it can be just as efficient as selling the home if you expect the home value to continue to grow.

Reverse Mortgage

The amount of income or capital provided by the reverse mortgage accumulates as a debt on your home but requires no monthly payments like a regular mortgage, and they cannot cancel the mortgage, so you can’t be forced out of your home.

The maximum income or capital you can take out is between 25 and 40% of the value of your home. The older you are the higher the percentage because they want to avoid a situation where the accumulated loan balance with interest exceeds the value of your home. That’s because they guarantee that if the loan balance exceeds the home value, you don’t have to pay back the excess.

When the home is eventually sold, or on the death of the second spouse, the reverse mortgage is repaid and you keep any excess of the value above the amount you owe.

Reverse mortgages have become much more popular and accepted in the past few years, especially since the interest rates on them have come down to just a bit over the rates on a conventional long term mortgage. Give us a call if you’d like to find out more.

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