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Desperately seeking coverage

Who'll pay your medical, dental, drugs and life insurance coverage when you retire? Many companies are freezing or dropping defined benefit plans and experts say it's important to check long before you go, VIC PARSONS writes

Special to The Globe and Mail

VICTORIA -- You've listened to the advisers and have your retirement finances in order: Company and government pensions, RRSPs, investments and maybe even a little contract work on the side will cover your planned lifestyle for 30 years and more after you leave your full-time job.

So what are you missing? Think employer-sponsored benefits -- medical, dental, drugs, life insurance, for example -- which may shrink or disappear altogether when you wave goodbye to your workplace.

There's a seemingly endless array of items that you may end up having to cover on your own: prescription drugs, ambulances, orthopedic shoes, psychologists, nursing care, out-of-country care, hearing aids, glasses, preventive services such as X-rays, lab tests and so on.

Even those luxuriating in the best available pension plans will have to ante up for many of these expenses. And with many employers these days casting a wary eye on the growing cost of coveted direct benefit pension arrangements, there's no guarantee when you retire that benefits offered now will still be on the table.

So what should you do if your benefits disappear when you retire?

First find out whether you can convert your company benefits plan to an individual plan, says Jane Petruniak, a consultant with financial management firm Watson Wyatt in Vancouver.

A number of companies allow conversion of life insurance, and some even do medical and dental, so you keep the policy and pay the premiums.

If you can't convert, find out whether you can get coverage through your spouse's job.

No luck? Then find out what government programs are available, when they apply and what you'll need to bridge you until they kick in. A retirement benefits program will cover off at least some of the potential expense. These do not come cheap, but the tradeoff is a degree of peace of mind.

"The trick to retirement is to not let these things be a surprise," Ms. Petruniak says. "The days of expecting an employer to take care of you beyond retirement are, I'm afraid, going the way the way of George Jetson and Barney Rubble and those other cartoon characters.

"The longer lead time you give yourself to prepare for retirement, the better opportunity you have to do research.

"What you don't want to be doing is on the eve of your retirement being suddenly faced with a buying decision that is fairly complex and significant financially."

How do you find the best deal? Your employer may have information already collected, so check there first. Also some professional groups have set up benefits packages you should take a look at.

Wendy Poirier, managing principal for health care with financial consulting firm Towers Perrin in Calgary, says prospective retirees should investigate what their current annual costs for health care and insurance are for their family.

"It's so easy not to pay attention when your employer is paying for health care," Ms. Poirier warns. "You should learn what's available through your employer, through government plans, and through private insurance for things like critical illness and long-term care."

Ms. Poirier says the optimal age to start looking into these issues is the mid-40s. "That's especially if you want to retire early and the employer is not going to provide any benefits."

Independent pension consultant Marilyn Lurz of Toronto says only about 27 per cent of private-sector employees in Canada have employer-sponsored pension plans.

"That's scary. It means the rest are completely on their own. We're talking financial security here. How do you afford health care and dental if you haven't done any retirement saving?"

Ms. Lurz notes that many companies, seeing increasing pension costs erode their bottom lines, are freezing or dropping defined benefit plans that guarantee retirees a specific fixed payment.

Ms. Petruniak says employers are trimming back in other ways, a trend that puts more emphasis on the individual. They may tighten up eligibility for benefits by increasing the number of years an employee has to work for the company before they are covered, or require a much larger deductible than in the past. "Benefits are not being given away as lightly as they once were."

Many companies have turned to defined contribution plans, where the employer puts a specific amount of money into a pot for each employee and it is left to the employee's discretion what services he or she purchases. These are less of an investment risk for the employer but obviously puts a huge onus on the individual to manage the benefits.

"It's saying, 'Here you are. It's all you're getting. It's up to you to deal with it,'" says Ms. Petruniak. "Now there's a realization that there's a bit of responsibility that the employer has to make sure that people understand what they've got."

It's an increasingly big issue for employees, says Ms. Poirier.

"They are faced with either no benefits, in some cases, or a capped amount of cash that they can spend on their health care when they decide to retire."

If you do opt to buy into a retiree benefits program, it's important to know what may and may not be covered. Private plans pay expenses above those covered by government health plans and other health plans the retiree might hold.

Among things that are not likely to be covered are cosmetic, elective or experimental surgery, nursing home or long-term care, smoking cessation pills or devices, vitamins, obesity drugs.

You can buy long-term care plans, of course. As an example, one inflation-protected plan offered by Sun Life provides $500 a week for 250 weeks. For a 50-year-old man the annual premium would be $985.50, while for a woman the same age the premium would be $1,429. (The cost difference is related to claims experience.)

Costs of these plans vary widely according to age, level of coverage, family size and province. A couple aged 55 to 59, for example, could spend monthly amounts ranging from $155 to $210 for basic coverage, and $215 to $285 monthly for enhanced coverage, for programs that include extended health care, dental and drugs. The amounts you pay depend upon what expenses your province covers.

Also, with costs of prescription drugs soaring, it's wise to be aware that even enhanced plans may fall short of all your costs. An enhanced plan may, for example, cover up to $4,000 of drugs in a year but you may need medication that costs $15,000 to $20,000.

"That would be like buying fire insurance on your house that only covers your garage," says Darryl Leach, a principal with Towers Perrin in Toronto.

Diana Deverall-Ross, vice-president of individual health insurance with Sun Life Financial in Waterloo, Ont., notes that people are living longer and there are predictions that may be living in retirement longer than they participate in the work world.

"What we're seeing with the 'sandwich generation' is baby boomers looking after their parents, and that's raising awareness and concern about the risks to their families when they themselves retire. People don't want to be a burden on their families, but the reality is that if they are not preparing for this financial risk, they will be a burden."

Questions to ask

Before you retire, Watson Wyatt consultant Jane Petruniak says, make sure you know what benefits you'll have. Ask:

What benefits am I entitled to under my company plan?

What can I convert to a private plan under my company coverage?

Am I likely to get another job that will provide benefits?

Can I get coverage under my spouse's plan?

Can my employer provide any information on products I might buy? Where else can I get information? Does my financial planner have any ideas?

What can I access under any association, fraternal or other groups I belong to?

What risks can I plan for and where is my insurance dollar going to be best spent?

© The Globe and Mail

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