I find that many people do not understand the key differences between disability insurance and long-term care (LTC) insurance. The most common misconception is that long-term care insurance is strictly for seniors and disability insurance is for everyone else. While there is some truth to that generalization, there are plenty of exceptions — where one product is a better solution than the other irrespective of age. Approximately 40% of those receiving long-term care are between the ages of 18-65 — so this isn’t a product just for seniors!
Disability Insurance
Essentially, disability insurance is a product that protects your ability to earn an income — arguably your most valuable asset. If you were to become disabled due to sickness or injury — meaning that you couldn’t perform the duties of your occupation — then the insurance company would pay you a percentage of your income (approximately 50%-70%) tax-free until you are no longer disabled or for a certain time period. That is an oversimplified explanation, but it covers the key points. It is important to understand policy provisions and key riders (optional benefits), but explaining the details of these features is not the intent of this article.
There are variations on the definitions of the word “disabled” used by insurance companies. This is one of the most important considerations when comparing products. There are several options for benefit periods. The common benefit periods for long-term disability insurance are: 2 years, 5 years, 10 years, to age 65 or 67. Short-term disability insurance kicks in after a short waiting period (typically 7 days) and will last for 6 months. Often times these two types of insurance will dovetail if you work for a company offering decent disability benefits. Most self-employed people will purchase only a long-term disability policy to cover the more substantial risk of a long-term disability.
Long-term Care Insurance
LTC insurance is a product that also protects you from major financial loss due to sickness or injury. LTC insurance does not replace income; it pays towards the cost of receiving care. To receive benefits under this policy you must be unable to perform at least 2 out of 6 activities of daily living (ADLs): dressing, bathing, eating, toileting, continence, transferring, and walking. A cognitive impairment such as Alzheimer’s Disease would also trigger benefits. So, in other words, you must have suffered from a very serious injury or disease. The insurance company pays a benefit amount (such as $3k or $4k per month) for a specified period of time. Common benefit periods are 3 years to 10 years or lifetime. The benefit amount goes towards the cost of care — ranging from home care to assisted living care to care in nursing home facilities. Again, this is a simplified summary of long-term care insurance; there are many variations and unique plan designs.
Keep in mind: There is NO coverage for long-term care with health insurance or Medicare plans! This is mistaken notion held by MOST people. I have read several sources that attest to this common misconception.
Summarizing LTCi and Disability Insurance
For most people the choice is fairly simple. If you are self-employed (or have no employer coverage) and need income protection, then by all means talk to an advisor about disability insurance. Request a quote and look for an agent who really understands the product. Same thing goes for LTCi. If you want to protect against this risk and you are in your mid-40s or older, it’s worth receiving advice and quotes from an expert.
In the next post, I will discuss some things that are not commonly found on the Web. There are instances where it makes more sense for a 40-something to buy a long-term care policy instead of disability insurance. In fact, it might be the only product for which he/she qualifies.
Also, there are LTCi products that are considered “cash-benefit plans”, where a part of the benefit is paid as cash. The insured person can spend the money however he or she chooses. In this sense, it can be used as a type of income replacement product. So, the product lines have blurred a little. This, however, opens opportunities for creative solutions. Again, more on this in the post to follow.
Peachtree Insurance Advisors Greg Sanders 678-236-1600 www.insuranceAdv.com
