Had Margaret Ames been aware that non-subsidized private personal care providers, known as assisted living facilities, can easily cost more than $40,000 per year, she would have made sure her father, Jim, had sufficient resources to fund any assisted living services he might require in his old age. With her father now disabled and faced with an urgent need for specialized services, Margaret discovered that Jim’s income was just $30,000 a year, comprised of a reduced work pension, reduced Canada Pension Plan (CPP) benefits and old age security (OAS). Jim had to leave work at age 58 and begin drawing his retirement pension and CPP early.
Faced with an approximate funding shortfall of $14,000 per year, and with no other resources available, Margaret had to provide the additional capital required to get her father into the assisted living facility. To do this, Margaret covered the first year's shortfall from her Registered Retirement Savings Plan (RRSP), and will forgo future RRSP contributions as long as her father requires assisted living services.
Looking back, Jim could have purchased long-term care insurance and removed the financial hardship that Margaret has suffered. This is because long-term care insurance is built to provide financial support not provided by government subsidies and public funding programs.
Long-term care insurance is a recent development for Canadians, having originated in the United States during the 1980s. “It is designed for a number of purposes—to protect some of a person’s assets and income, to allow a person to pay for their own long-term care, to maintain one’s financial independence and to maintain personal peace of mind,” says Cathy Percy, a long-term care specialist at Sun Life Financial. In Jim’s case, a suitably funded LTC insurance policy would have paid the annual $14,000 shortfall.
If Jim purchased a long-term care insurance policy where the benefit was for life, indexed to annual inflation and offering a waiver of policy premium should Jim become disabled, he would pay $1,836 per year for $1,200 per month of financial protection.
According to Cathy Percy, the benefit versus the cost of purchasing a long-term care insurance policy is obvious. Even if Jim had paid policy premiums for 23 years, his cost for protection would still not amount to the cost of just one year of long-term care in an assisted living facility. His daughter also would have avoided lost benefits, lost capital-appreciation potential and a heavy tax penalty for her one unscheduled RRSP withdrawal.
Margaret and Jim's financial breakdown
Jim’s financial situation
- Reduced annual work pension $18,837
- Reduced annual CPP benefit $5,292
- OAS annual benefit $5,871
- Assisted living facility annual funding shortfall $14,000
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Margaret’s contribution costs- Year one RRSP withdrawal $14,000
- Income tax liability $5,600
- Subsequent yearly contributions $14,000
- Lost annual tax savings $4,200*
* Excludes lost savings and tax-deferred compounding
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Stephen Gadsden is a chartered financial planner and author.
