The old adage “your health is your wealth,” rings true when you consider the financial consequences of a major illness. This article explores two types of health insurance: disability and long-term care.
Disability Insurance covers your ability to earn an income, which is your single greatest asset. Disability insurance (also known as disability income or sick pay policy) is designed to pay an income if the insured is unable to work.
Disability insurance policies usually only provide coverage for a maximum of 60–70% of income replacement. When a disability occurs, the loss of income may be made up by government benefits, savings, or investments. Insurance companies will limit the overall amount of coverage, regardless of your income. This is because statistics show that the greater the amount of disability insurance people own, the lower the likelihood of their recovery.
Most people have some life insurance, as well as insurance on their homes and autos. In addition, a majority of Americans have major medical health insurance. However, when it comes to disability insurance, most people are uninsured or underinsured.
Remember to consider the taxation of disability insurance when calculating your disability coverage. If your disability insurance premiums are being paid pre-tax through an employer or a business, then the benefit will be taxed. Therefore, to estimate your total after-tax disability protection, you need to reduce the benefit by an estimated tax amount.
Many employers offer additional disability insurance for their employees to purchase at very attractive rates, and they provide the option to purchase it before or after tax. Consider employer-provided insurance as a low-cost alternative to individual insurance, and pay the premiums after tax since they are usually small. However, keep in mind that this coverage is not usually portable—that is, you can’t continue it if you leave your employer.
If you need additional insurance, consider obtaining several quotes. Your insurance agent will ask for your financial and health information to determine the amount of insurance for which you qualify. Disability insurance is not inexpensive compared to term life insurance because the risk of disability (morbidity) is greater than death (mortality), and the potential claims for a $2,000 monthly payout for a 35-year-old (if benefits are paid to age 65) totals $720,000.
The type of disability insurance policy and coverage amount you may qualify for depends on numerous factors, including your occupation. Ask your insurance advisor to obtain several quotes from well-rated insurance companies.
The following are some of the more prominent disability insurance features, benefits and riders:
- Non Cancellable: Policy cannot be cancelled
- Coverage/Benefit Period: Pay a benefit, usually until age 65, maybe 2, 5 or 10 years depending upon occupation. Limited lifetime benefit feature may be available.
- Guaranteed Renewable: Premiums cannot be increased
- Waiting Period: Period you must wait until disability income payments start (usually 90 days)
- Residual/Partial Benefit: Percentage of benefits paid if you are able to return to work part-time
- Offset: Most of your benefit should not be reduced if you receive other benefits; however, a social security disability offset is a common cost savings rider
- Occupation and Disability Definition: Liberal definition of disability related to your occupation. Varies by company.
- Other riders: Various riders to increase benefits
Long-Term Care Insurance has grown tremendously over the past decade because of population aging, longer life spans, the statistical likelihood of needing some care in an assisted living facility, and the astronomical cost of providing such care.
The dilemma of long-term care insurance is that it is expensive (easily costing from many hundreds for younger people to several thousands of dollars for older people). The adage is that the people that need the insurance, or those without sufficient assets to afford a nursing home stay, can’t afford it, and those that can afford it have sufficient assets to pay for a lengthy stay so they may not need it.
The average cost for a nursing home for full-time care exceeds $70,000 per year, depending on where you live. You can see how this would easily exhaust the savings of those of modest means.
Many people ask if Medicaid is an option. Yes, it is an option, but to qualify for it, you must be impoverished and in need of government assistance. Federal and state laws have recently become stricter, limiting people’s ability to legally shelter or gift money so that they qualify for Medicaid.
The types of long-term care insurance policy permutations vary greatly from company to company. The following are some tips for you to consider regarding your long-term care insurance needs.
- Consider your family medical history. If there is a family history of needing long-term care or just of great longevity, you may want to consider purchasing it.
- Consider your current age. Few people make long-term care insurance a priority in their 40’s. Cost goes up with age, so you may want to consider purchasing it while young and in good health, preferably in your 40’s up to your early 60’s, after which it becomes pretty expensive, but it still should be considered.
- Find an insurance agent that specializes in long-term care insurance.
- Obtain several quotes with different types of policies and coverage amounts.
- Obtain the insurance company’s financial ratings. Most insurance agents should be able to provide this information for you.
- Be leery of low-premium policies being marketed without an agent through the mail, from companies with unfamiliar names.
- Do your research before buying. Obtain information from AARP and your state’s department of insurance.
- Obtain a financial plan, perhaps with eFinplan, to examine your actual needs for this type of insurance and your overall financial health.
- Never buy any type of insurance without first consulting your overall budget and financial plan.
Key Long-Term Care Insurance Issues
- Coverage: Long-term care policies can pay for nursing home care, home care, assisted living, adult day care, and for family or friends to provide care at home.
- Daily or Monthly Benefit: This is the amount of benefit that the insurance company will pay, regardless of your actual costs.
- Elimination or Waiting Period: The period in which you must pay all of your long-term care expenses out of your own pocket before the insurance policy kicks in. Longer waiting periods usually lower your premiums.
- Benefit Period: The length of time that you will receive benefits from your policy. You can choose a benefit period for various lengths of time or for life. The longer the period, the higher the premium will be.
- Inflation Protection: A rider that increases your benefit depending on an inflationary factor to address the escalating costs of providing health care. Without this rider, you can become quickly underinsured. Insurance companies provide several options,
- Eligibility Description: Make sure the policy clearly explains when eligibility for coverage begins and how it is determined.
- Hospital Stay Requirement: Check to see if the policy has a requirement that you spend time in a hospital before receiving benefits. Try to avoid this condition.
- Renewable: Will be renewed as long as you pay the premiums; coverage can’t be cancelled.
- Rate Increase: Ask the agent to provide the company’s history of rate increases.
- Waiver of Premium: Rider that pays the premium once you begin receiving benefits.
- Deductible: Has one deductible for the life of the policy.
- Pre-existing condition limitation: Make sure that the policy automatically covers pre-existing conditions you disclosed on the application. The insurance company may put limitations on some conditions.
- Inflation protection rider: Determine choices for inflation protection, including an automatic increase in your benefit on an annual basis or a guaranteed right to increase your benefit.
- Ability to Lower Coverage: Check to see if you are able to decrease the amount of coverage if premiums become unaffordable.
- Dementia coverage: Make sure that the policy provides coverage for dementia.
Summary. Long-term care insurance and disability insurance help protect you and your family from suffering significant financial loss. Talk to your financial planner and refer to your written financial plan. If you don’t have one, consider online planning with eFinPLAN to provide educational materials and an evaluation of your insurance needs in these areas. Always consult your trusted professional insurance advisor for more information.