Prescription for health: Healthcare financial planning solutions for Canadians

(November 13, 2002) On September 17, word that the GST could increase to 10% made Canadians gasp in horror. The rumour was scoffed at by Prime Minister Jean Chretien in an effort to ease fears, even though it could have brought in an additional $9 billion a year — funds to pay for what is truly intimate and dear to Canadians — universal healthcare. It’s a topic that remains hotly debated in Canada. Certainly what may be top of mind, especially for financial advisors, is the rising cost of healthcare in Canada. Advisor’s Edge considered this when it commissioned the Health and Wealth Survey. Three hundred seventy-seven advisors from across the country responded about their clients’ concerns on the future of healthcare funding in Canada. It is perfectly fitting, too, that this month Roy Romanow, the commissioner reviewing the future of healthcare in Canada, will release his report outlining recommendations on how to fix medicare.

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Despite what Romanow suggests and what the government implements, financial planning for growing healthcare costs will become a reality. Canadians are living longer. More than 225,000 Canadians are turning 65 each year. By 2010 a quarter of Canada’s population will be over 65. Longer lives mean a greater chance of living with or having a parent live with a serious illness such as cancer or paralysis from a stroke. Your clients need to understand the responsibility is theirs to cover personal healthcare costs, whether it means remodelling the house to accommodate a wheelchair or paying a home care nurse to give them their medication. But there are solutions — some in the hands of financial advisors. Disability insurance, critical illness insurance and long-term care insurance ranked at the top of the list when advisors were asked where clients allot their insurance dollars. Our survey reports that 16.8% of advisors have clients who save money for personal healthcare costs. These clients, on average, allocate 18.8% of their savings. However, the majority of clients are not allocating enough, or any, money to healthcare savings suggesting a heavy reliance on a socialized healthcare system. “In B.C. I pay $120 a month in taxes for healthcare and I have two dependants,” said Jim Rogers, chair of The Rogers Group Financial Advisors Ltd. in Vancouver. “People have no sense of what they are getting for that money.” (Click here for more details of the healthcare survey.) There is no magic bullet to survive the healthcare spending crunch, but there are two ways to try: insurance or savings. Make it a policy Nowadays, we are surviving some illnesses that were fatal 20 years ago, but overcoming a critical illness can leave clients drained — physically, emotionally and financially. Critical illness insurance (CI), a cousin to disability and long-term care insurance, is meant to rescue clients from financial hardship. Alphonso Franco, CEO of the Victoria-based Critical Illness Insurance Centre, can rapidly list off scary international health statistics and says knowing the latest medical advancements helped him realize the power of CI. CI pays the policy’s face amount to the insured in a lump sum 30 days after the insured is diagnosed with a covered illness (60 days if diagnosed with cancer). Total new Canadian sales of CI for the first half of 2002 showed strong growth: During this time, the average policy size sold by career agents was $111,231 while independent advisors produced average policies of $95,945. Despite steady growth since its mid-1990s Canadian debut, CI has had relatively slow uptake. This is likely due to its newness but Franco attributed this to lack of knowledge — on the advisor’s part. “Advisors are afraid of CI because they see it as another product to learn,” he told Advisor’s Edge. “If they don’t talk to clients about this, someone else will.” Speaking at the Canadian Association of Insurance and Financial Advisors (CAIFA) conference in September, Franco said advisors themselves are the biggest obstacles to selling CI. Only a handful of the 200 advisors in the room admitted to owning a CI policy. “People ask me what the market is like for selling CI in Canada,” he told the audience. “Ask anyone if they have a CI policy and chances are they don’t.”

Company Perk

Innovative employers are making changes to the way they provide health benefits. Healthcare spending accounts (HCSAs), or medical savings accounts are gaining popularity as another creative way to pay for healthcare expenses. They usually augment a company’s traditional health benefits plan. HCSAs in Canada are typically funded by employers, a model that has worked well in the U.S. This is how an HCSA most commonly works: Company X contributes $500 per employee into an HCSA (tax-deductible). Employees are responsible for the use of this tax-free money for medical, dental or drug expenses the CCRA deems eligible under the Income Tax Act. Funds left over at year-end can be rolled over for 12 months. At the end of the following year, the employee loses the money. The money goes back to the employer and cannot be used as a bonus to the employee who did not use up all his HCSA money.

But compare policies, Franco cautioned. The price difference between basic and comprehensive CI is usually minimal. Most Canadian companies sell CI products that cover six or more critical illnesses. Only 11% of new policies sold are for basic coverage of five or fewer illnesses. Basic policies always include the big three: heart attack, stroke and cancer. The earlier, the better Health insurance specialists at Clarica visit clients at home to discuss long-term care insurance (LTC). Gillian Warrick, a former home care coordinator with the Nova Scotia Department of Health, joined Clarica this year and brings her frontline experiences to clients. The biggest challenge is convincing clients in their 30s or 40s to buy LTC. Most of her clients purchasing LTC are nearing retirement. As with all insurance products, the earlier clients buy, the better. According to Warrick, a 50-year-old male with a lifetime tax-free weekly benefit of $500 would pay a monthly premium of $70.28. A 60-year-old male requesting the same coverage would pay $30 more. “It looks expensive but for many people it’s cheaper than paying for home care out of pocket,” she said. As the population ages, 60% of respondents say their clients report alarming worry about contributing to their parents’ healthcare costs. “Often I find family members will share the cost of LTC coverage so their parents can stay at home as long as possible,” Warrick said. Twenty per cent of Canadians between ages 55 and 74 will live with a long-term disability; at age 85 that number rises to 45%. Customized annuities available to help cover nursing care expenses are based on shortened life expectancy mortality tables and calculate how much a lump sum investment can provide in monthly payments for the patient’s nursing care for three, five or 10 years, or lifetime coverage. This can be particularly helpful if your client does not have LTC. While cheaper to implement than a traditional annuity, any dollars locked-in mean a smaller estate passed on to children. Adequate coverage? Corry Collins, a Halifax-based chartered life underwriter, said he sells disability insurance (DI) because group insurance is inadequate and if clients take a good look at their policy they will likely wish they had more coverage. That is where DI can fill the gap. “We are living longer and need more money to fund a longer life,” he told advisors at the CAIFA conference in Ottawa. If you are 30 years old today, there is a 54% chance you will be diagnosed with a physical or mental disability of 90 days or more before age 65. Disabilities also include mental impediments, Collins reminded the group, adding that chronic fatigue syndrome is very common among Canadians. “The statistics say you will become disabled but they also say you will return to work.” According to LIMRA, an association providing research on the insurance industry, more than 23,000 Canadian DI policies were sold worth approximately $29 million in premiums by June 30, 2002. Most clients currently buying DI products are surprisingly young — they are between 25 and 34, married with kids and have an annual household income of at least $100,000, he explained. Smart saving Next to insurance is the good old nest egg. “Money people have saved for travel in retirement may become money used for healthcare,” noted Cheryl Bauer Hyde, a financial planner in Regina. This means helping your clients know their priorities. In addition to funding a child’s education, saving for rising healthcare expenses should rank at the top of their list. Sources for money to fund healthcare may be found in the most unlikely places. Forty-three per cent of respondents report their clients would have to liquidate assets to cover healthcare expenses. Bauer Hyde is not troubled by the statistic. “We scoff at liquidating homes and other assets to cover healthcare costs but that could be the financial plan for clients who don’t intend to pass on large estates to children.” An unequivocal statement from political leaders about healthcare funding shortages would make it easier for advisors to discuss insurance and savings with clients. Failing client interest in insurance and saving, clients can throw themselves at the mercy of what may be left in the health system.

Average Percentage of Clients Saving for Personal Healthcare Costs
	Total	Atlantic	Quebec	Ontario	Prairies/N.W.T.	B.C./Y.T.
	%	%	%	%	%	%
75 to 100%	1	8	5	1	0	0
50 to 74%	1	8	3	3	9	2
25 to 49%	16	31	20	16	11	15
1 to 24%	54	46	56	54	60	47
0%	25	8	16	27	20	36
Overall percentage	16.8%	28.9%	20.9%	15.1%	17.4%	12.7%
Source: Health and Wealth Survey, 2002

Average Percentage of Clients Who Would Have to LIquidate Assets to Pay for Personal Healthcare
	Total	Atlantic	Quebec	Ontario	Prairies/N.W.T.	B.C./Y.T.
	%	%	%	%	%	%
75 to 100%	12	0	11	14	11	22
50 to 74%	25	8	27	24	26	24
25 to 49%	35	58	33	33	40	29
1 to 24%	25	33	27	29	20	22
0%	2	0	2	1	3	4
Overall percentage	43.0%	31.0%	42.3%	42.0%	43.5%	47.0%
Source: Health and Wealth Survey, 2002

Sheila Avari is assistant editor of Advisor’s Edge. savari@rmpublishing.com.

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(11/13/02)