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Long-term care insurance coverage kicks in once you’re no longer able to independently perform two or more activities of daily living, such as getting dressed, eating, or getting in or out of bed. The premium costs for the coverage depends on a number of factors including how young and healthy you are when you apply.

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Jennifer Jacobs, a long-term care specialist in Oakville, Ont., who has built her practice around insurance coverage for living benefits, believes we're heading toward a "perfect storm."

The population of aging Canadians is growing. They are living longer in retirement and may be financially unprepared for the potential costs of long-term care. Governments are equally unprepared to cover the mounting bill.

"The costs of long-term care can be a significant burden, in particular for middle-class Canadians," says Ms. Jacobs, a certified financial planner. "They may have prepared well for their retirement, only to see their savings wiped out if one – or both spouses – needs expensive, hands-on assistance over the longer term."

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One of her membership associations believes it has a solution to help relieve the potential financial load for taxpayers and governments alike: Allow Canadians to withdraw funds from their registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) on a tax-deferred basis to purchase long-term care insurance policies.

That's the proposal put forward by CALU, the Conference for Advanced Life Underwriting, a national membership association for established insurance, tax, financial, accounting and actuarial professionals, as part of the standing committee on finance 2018 pre-budget consultations.

Tax-free withdrawals up to $24,000

CALU proposes that Canadians should be able to withdraw up to $24,000 from their RRSPs and RRIFs, without immediate tax consequences, to purchase long-term care policies – much like borrowing to fund a first-time home purchase (through the Home Buyer's Plan) or to attend postsecondary education (through the Lifelong Learning Plan). This amount, comments CALU, is based on "the average needs of middle-class Canadians" and is sufficient to provide a "meaningful benefit to subsidize long-term care expenditures."

This change would mean the RRSP or RRIF account owner could use part of their existing, tax-deferred savings to pay the policy premiums, instead of finding resources outside the plan. However, under CALU's proposal, the funds borrowed would eventually need to be repaid, with any amount outstanding on death included in that person's income, similar to the existing provisions that allow withdrawals to purchase a home or finance postsecondary education.

This proposal is a "new and unique approach to assist with the preparedness and independence of Canada's aging citizens that fits within the existing federal tax policy framework," says Gilles Chevalier, CALU chair. "It would help Canadians get maximum benefits from their retirement savings – and it would also reduce the burden of family support obligations and preserve government resources through reduced reliance on public programs and institutions for support."

A looming liability for individuals, families and taxpayers

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The federal government under Prime Minister Justin Trudeau has put forward a number of initiatives since 2015 designed to improve the financial security of retirement-age Canadians, including enhancements to the Canada Pension Plan and reinstatement of the eligibility for Old Age Security and Guaranteed Income Supplement at age 65.

Statistics Canada estimates that by 2030, more than one in five Canadians will be older than 65, and with age, losses of functional capacity will become both more common and more severe. Research from the Canadian Institute for Health Information suggests that by age 85, 25 per cent of Canadians reported a moderate to severe, or even total limitation in functional capacity.

Insurance coverage tied to loss of capacity

Long-term care insurance, sold in Canada, the United States and Britain, is a relatively new product. In Canada, it has never achieved wide buy-in, which Ms. Jacobs speculates is due to multiple factors: the "mistaken belief" that government resources will be sufficient to cover individual long-term care needs; a lack of awareness of long-term care insurance, even among financial advisors; and the reality that middle-class Canadians face competing demands for their household budgets, with planning for long-term care often falling by the wayside.

To counter criticisms that this proposal is just a way for the insurance industry to create new business, Mr. Chevalier says the overall objective is to "reduce the burden of family support obligations and preserve government resources through reduced reliance on public programs and institutions for support."

In a nutshell, these policies provide a way to insure against the cost of long-term care, either by covering eligible expenses or by providing a monthly income benefit that can be used in addition to state programs to cover the costs of care.

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The coverage kicks in once you're no longer able to independently perform two or more activities of daily living, such as getting dressed, eating, or getting in or out of bed. The premium costs for the coverage depends on a number of factors including how young and healthy you are when you apply.

The benefit, when it is received, can be used to defray costs associated with care at home or the costs of a public or private long-term care facility. The importance of accessing care outside of publicly-funded long-term care facilities is growing rapidly as access to public facilities has changed over time. For example, the Ontario Long-Term Care Association reports that while in previous years, public facilities accommodated a "mix of residents with low to very high-care needs," since 2010, only people with high need or very high-care needs are eligible for long-term care in Ontario.

While this shift has been offset by the provision of additional resources for home care in Ontario, constraints on publicly-funded facilities can only be expected to grow.

More policies for more Canadians

CALU's proposal is part of a suite of suggestions, which also include a recommendation that the federal, provincial and territorial governments "develop a national approach to informing Canadians as to the need to plan for their long-term care funding expenses." Its ultimate goal is to get more Canadians educated on the need to save for the potential costs of long-term care, and to consider long-term care insurance as one of the tools to help cover off this significant financial risk.

"Allowing Canadians to access funds in their registered accounts tax-free to acquire long-term care policies could provide a way to help meet goals for a lot of people," Ms. Jacobs says. "This is especially the case for women, who face the most significant impacts from long-term care needs in Canada, as providers of care to family members and who most frequently are in need of care themselves."

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Alexandra Macqueen, CFP, teaches and writes about finance in Toronto. She is co-author, with Moshe Milevsky, of Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income For Life. You can follow her on Twitter at @MoneyGal.

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