Do I Need Disability or Long-Term Care Insurance?

Article by R. Joseph Ritter, Jr. CFP® EA

One of the most devastating hits to a family’s finances comes from not being able to work due to prolonged disability or debilitating medical event requiring long-term health care. Health insurance, Medicare and Social Security are generally insufficient to take up the gaps in such events, leaving families reeling from the financial devastation.

Disability insurance supplements income in the event you are unable to work due to a disability. Coverage is fairly standard, however, the policies can be written with varying features that affect coverage and premium. Reducing coverage to make the premium affordable is not necessarily the best game plan because you are still left with gaps. Also, paying for something that does not provide your family with what they need is a waste of resources.

Common considerations in disability insurance include

  • Elimination Period – this is a period of time between the beginning date of your disability and the date insurance begins to pay. Shorter elimination periods carry a higher premium. Your elimination period should be coordinated with your emergency fund. To achieve the best premium, an elimination period of 6 months is recommended, provided that your emergency fund is up to the task.
  • Short-Term or Long-Term – short-term policies provide a limited duration of benefits, usually 1 year. Long-term policies can provide benefits for the duration of your lifetime but commonly terminate at age 65 when Social Security and other retirement benefits begin to pay.
  • Own Occupation or Any Occupation – coverage for your “own occupation” is more favorable to you. If you are unable to work in your current occupation, benefits will be paid. If your coverage is for “any occupation,” you will receive benefits only if you are totally disabled and unable to work in any occupation. This means you are required to work in another occupation or demonstrate that you are unable to do so.
  • Social Security Integration – this policy provision coordinates benefits with payments you receive from Social Security. Insurance benefits are commonly 60% to 70% of your income. You have the option of either adding Social Security payments to the insurance benefits or reducing insurance benefits by Social Security payments. Premiums are lower if you integrate Social Security.

Disability insurance can also include rehabilitation and work with you in recovering and getting back to work.

Like disability insurance, long-term care insurance provides benefits at any age or stage in life if you require health care for a prolonged period of time. No one plans to have a stroke, debilitating heart attack, degenerative disease or other serious illness. Recovering from a brief illness and a few days off work is hard enough. Not being able to work anymore due to incapacity or for a prolonged period of time due to a serious illness can be financially debilitating.

Long-term care insurance can provide funds to pay for

  • nursing home care (only)
  • assisted-living facility care (only)
  • home health care (only)
  • comprehensive benefits for nursing home, assisted-living facility and/or home health care

Long-term care insurance is also beneficial for senior citizens to provide a means to pay for health care needs in retirement.

Long-term care insurance can play a very important role in protecting your financial future. Most importantly, insurance can help preserve your assets. Losing your income is bad enough. Losing your assets because you can’t work is preventable.

While the premiums for a disability or long-term care insurance may be expensive, don’t assume that income and assistance from Social Security will be enough to provide for your family’s needs. It probably won’t be. The best you can do for yourself and your family is to obtain a quote and then evaluate your budget and priorities. You should also work with a financial planner to be sure that your overall financial plan is coordinated with the insurance coverages you wish to obtain. Don’t assume you are fully protected just because you have insurance.

If you don’t have insurance to cover the gaps, then you should consider what your plan will be if something does happen. In today’s mobile society, falling back on a family support network may not always be an option.

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