Critical illness and long term care: why you need a plan

1. Critical illness and long term care: why you need a plan

2. Disclaimer • The following information is being presented on the understanding that it is for information purposes only. Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation or other professional advice. • No one should act upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisors.

3. Agenda • An inconvenient truth – Today’s health care realities • The industry’s response – Basics of Critical Illness and Long Term Care Insurance • Why you need a plan – A rational approach to quantifying the risk • Talking to clients - Making an emotional connection to the need

4. An Inconvenient Truth Today’s Health Care Realities

5. TM and c 2006, Paramount Classics, a division of Paramount Pictures, all rights reserved.

6. Health care costing “an arm and a leg” • For the last ten years, health care spending has outpaced both inflation and population growth • 30% of health care spending ($44 billion in 2006) is funded privately (via insurance and out-of-pocket) Health care spending to reach $148 billion this year, Canadian Institute for Health Information, Media Release, December 5, 2006.

7. Health care costing “an arm and a leg” • Government home care spending reached $3.4 billion in 2003/04, an average annual increase of over 9% from 1994/95 • Even so, 65% of adults who needed help with eating, bathing or dressing did not receive government-subsidized home care Public-Sector Expenditures and Utilization of Home Care Services in Canada: Exploring the Data, Canadian Institute for Health Information, March 2007. Kathryn Wilkins. "Government-subsidized home care" in Health Reports, Vol. 17, No. 4, October 2006, Statistics Canada. Based on 2003 statistics.

8. Care concerns • Widespread use of anti-psychotic drugs in nursing homes • Some facilities dispensing the drugs much more often than others, sometimes without identifying obvious need for them • Serious adverse events associated with use of anti-psychotics (risk of falls, hip fracture, parkinsonism, death) “Ont. bill covers anti-psychotics in nursing homes” Canadian Press, April 11, 2007 “Nursing homes with high antipsychotic prescribing rates more likely to dispense drugs to residents who don’t need them”, Institute for Clinical Evaluative Sciences, Media Release, April 09, 2007

9. Medical advances and increased costs • Increased prices for newer drugs • Technological change likely accounts for 25% of health expenditure growth in Canada “Understanding Health Care Cost Drivers and Escalators”, The Conference Board of Canada, March 2004

10. Our bottoms are on the line • 3 in 5 Canadian adults are overweight or obese • More than 1 in 4 Canadian children are overweight or obese Health Reports, Statistics Canada, Vol. 17, No. 3, August 2006

11. Cancer incidence • 39% of Canadian women and 44% of Canadian men are expected to develop cancer in their lifetimes • 30% of new cancer cases will occur in young and middle-aged adults. • Cancer incidence is rising in young adults ages 20 - 29 and females up to age 39. • About 1300 Canadian children develop cancer each year Canadian Cancer Society, National Cancer Institute of Canada: Canadian Cancer Statistics 2007

12. Cancer incidence ratesAges 0-64 - Cases per 100,000 - Age-adjusted Source: National Cancer Institute

13. Survival rates improving • Mortality rates have declined for all cancers combined and for most types of cancer in both sexes since 1994 (exceptions are lung cancer in females and liver cancer in males) • Five year survival rate for breast cancer is 86% • Five year survival rate for prostate cancer is 92% Canadian Cancer Society, National Cancer Institute of Canada: Canadian Cancer Statistics 2007

14. 5-year cancer survival rates Source: National Institutes of Health

15. Mortality rates – heart diseases Source: National Cancer Institute - deaths per 100,000

16. Who will need care? • At age 65, the lifetime probability of developing either a need for help with two or more activities of daily living for at least 90 days or a cognitive impairment is 44% for males and 72% for females Cohen, Marc A., Maurice Weinrobe, Jessica Miller, and Anne Ingoldsby. "Becoming Disabled After Age 65: The Expected Lifetime Costs of Independent Living," AARP (American Association for Retired Persons) Public Policy Institute, 2005.

17. Who needs care? • 7.4% of Canadians age 65 and over live in institutions • 31.6% of Canadians age 85 and over live in institutions • For those who live in private dwellings (not institutions): • 8.7% of men and 12.7% of women age 65 and over receive personal care • 30.5% of men and 38.5% of women age 85 and over receive personal care A Portrait of Seniors in Canada: 2006. Statistics Canada

18. Proportion of individuals age 65+ Over the last 30 years, the proportion of individuals age 65 and over increased by 23%. Over the next 30 years, it’s expected to increase by 85%.

19. Life expectancy Source: Statistics Canada

20. A shift in risk Incidence of death vs. critical illness before age 75 Critical illness in males Incidence rate Death in males Critical illness in females Death in females Current age Source: Munich Reinsurance Co., 2003

21. Source of financial risk Before Today Risk Dying Surviving So l u t i on Critical Illness & LTC Insurance Life Insurance

22. The Industry’s Response Basics of Critical Illness and Long Term Care Insurance

23. Critical illness insurance • Provides a tax free lump sum benefit upon diagnosis of a covered condition • 30 day survival period • Used at the client’s discretion • Optional ‘cost-recovery’ benefits: return of premium on cancellation/expiry; return of premium on death

24. Critical Illness Insurance Definition • No specific provisions in the Income Tax Act • Critical illness insurance is NOT Life or Disability insurance • Can be illness or accident insurance – CRA technical interpretation (2003-0026385)

25. CII – Individual Ownership Premiums • Are not tax deductible • Are considered to be personal in nature • Will not give rise to a credit for medical expenses Benefits • Received are non-taxable Return of Premiums • Non-taxable, both during lifetime and at death

26. CII – Corporate Ownership • Employee as benefit payee - Premium is taxable benefit for employee, employer deduct premium, benefits non-taxable for employee • Shareholder as benefit payee – may not deduct premium • Company as benefit payee – premium is capital expenditure not a current expense, no deduction Key Fact: CII benefits will not give rise to a credit to the capital dividend account

27. Standard Critical Illness Offering

28. Return of Premium 40, MNS, $150,000, end of 15 years Base Premium $1,788 + ROPCPremium$822 13.5% 5% Benefit $150,000 Alternative Investment $18,624 ROP $39,150 Guaranteed Note: Based on Sun T75, with ROPC at 15 years. Base premium includes annual ROPD premium of $106.50. Interest rate calculations done on beginning of period basis.

29. Target Market

30. 2005 Industry placement rates ranged from 60% to 76%. Source: Munich Re’s Critical Illness Survey 2006 *Not proceeded with includes: incomplete medicals, offers not accepted by the client, no reply, and clients choosing not to proceed with the application.

31. Munich Re’s Critical Illness Survey, 2006

32. Long term care insurance • Provides a tax free benefit if you are unable to take care of yourself (need another person to help you perform two or more activities of daily living – e.g. bathing, dressing or require continual supervision due to mental deterioration)

33. Product details: three plan styles • Reimbursement: reimburse expenses for eligible services* received on a given day, up to a pre-determined maximum • Indemnity: pay a pre-determined daily benefit if the insured person receives any eligible service(s)* on that day (even if the service(s) cost more or less than the pre-determined daily benefit amount) • Income: provide an income when the insured person requires care, without requiring a plan of care or proof of service *An individual plan of care is created for each claimant. The plan specifies the types and frequency (hours per day, days per week) of eligible services.

34. Customized plan design • Benefit type(s) - comprehensive benefit, facility care benefit • Benefit amount - from $150 - $2000 per week with or without inflation protection • Benefit duration - 100, 150, 250, or unlimited weeks) • Waiting period - 30 day, 90 day (option of 0 day for facility care if both benefit types selected) • Optional return of premium on death benefit • Payment period: • Longer of 20 years or to age 55 • Lifetime

35. Primary question to determine whether someone is eligible to claim: Is the person dependent on another person for care?

36. Two ways to be considered ‘physically dependent’ • Needs continual supervision by another person for protection from threats to their physical health and safety as the result of deterioration in mental ability from an organic brain disorder* *Organic brain disorders cause physical changes in the brain – Alzheimer’s, other forms of senile dementia, and brain injuries (from accidents or from strokes) are examples of organic brain disorders

37. Two ways to be considered ‘physically dependent’ • Always needs substantial physical assistance or stand-by assistance* from another person to safely and completely perform 2 or more of the “activities of daily living” – with or without the aid of assistive devices *Stand-by assistance means the other person must be within arms reach of the insured person each time the relevant activity of daily living is performed

38. Activities of daily living • Bathing – washing oneself in a bathtub or shower (including getting in and out of the bathtub or shower) or by sponge bath • Dressing – putting on, taking off, fastening and unfastening clothing and medically necessary braces or artificial limbs • Feeding – ability to get food into the body through the mouth or by a feeding tube

39. Activities of daily living • Toileting – getting to and from and on and off the toilet and performing associated personal hygiene • Transferring – moving into or out of a bed, chair or wheelchair • Continence – ability to control both bowel and bladder functions, or maintain a reasonable level of personal hygiene (including caring for catheter or colostomy bag)

40. Use of assistive devices • An assistive device is a device or tool that assists users in accomplishing day-to-day tasks • Home renovations (significant removal or replacement of any part of an existing residence) are not assistive devices • Examples of assistive devices to aid with bathing and dressing (most often, these are the first two activities of daily living that are lost): • grab bar, bath stool, hand-held shower head, long-handled brush, long-handled shoe horn, sock puller

41. Use of assistive devices • If insured person can independently use an assistive device to safely and completely perform an activity of daily living, then she/he is not dependent on another person for that activity • If insured person uses an assistive device but also remains dependent on another person, she/he is stillconsidered dependent for that activity

42. Tax treatment • No specific income tax laws for long term care insurance • The following information is what we believe based on current tax laws and current CRA interpretation

43. Tax treatment – individual ownership Can premiums be used when calculating the medical expense tax credit? • Only if the plan qualifies as a private health services plan (PHSP) • Income- and indemnity-style long term care insurance plans do not qualify as PHSPs • Reimbursement-style long term care insurance plans may or may not qualify as PHSPs

44. Tax treatment – individual ownership Are benefits taxable? • Cash benefits from income- or indemnity-style long term care insurance plans should not be taxed • Reimbursements made from LTCI plans are not are not taxed

45. Tax treatment – individual ownership Are actual medical expenses eligible for the medical expense tax credit? • With income- and indemnity-style plans, actual medical expenses may still be used when calculating the medical expense tax credit • With reimbursement-style plans, only expenses that are not reimbursed are eligible

46. Placement rate and target market Target Market Source: Sun Life

47. Why you Need a Plan A Rational Approach to Quantifying the Risk

48. Cost of care • Facility care: • Waiting lists can be long (one or two years) • Is this where you want to live? • Retirement homes: • Accommodation can cost over $5,000 a month • Personal care services may be in addition • Home care: • Depends on level of care required • Example: • 2 hours nursing care 3 days / week at $40 / hour • 2 hours personal care 7 days / week at $20 / hour • 3 hours homemaking 4 days / week at $20 / hour Total = $3,293 / month

49. The bottom line for your client • Today’s care cost: $3,293/month • Monthly cost of care starting in 25 years (2% inflation): $5,403 • Taking lost interest of 7% into account, 5-year care need would cost over $400,000 • 10-year care need would cost over $1 million

50. Sample lost wealth trailersdue to long term care withdrawals