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Understanding Disability and Long Term Care Insurance Policies

By: , dated January 25th, 2013

Disability Insurance

Disability insurance, like life insurance, is used to protect future earnings – disability insurance will replace your income in the event that you become physically unable to work. Although it gets less attention than life insurance, experts agree that disability coverage is at least as important.

While most people are prepared for the medical costs of severe injury or sickness (through health insurance), without disability insurance, they are not prepared for the loss of wages that accompanies such a tragedy. In general, if you count on your job to pay the rent and buy food, you should seriously consider disability coverage.

Disability Insurance Policies

Many employers offer disability insurance for their employees; however, the plans vary greatly, and some may not offer adequate coverage. Furthermore, any disability payouts from an employer’s policy are subject to taxes, while payouts from individual policies are not. Individual disability coverage is generally much more expensive than employer disability coverage; nevertheless, you should review any policies your employer has taken out, and consider purchasing individual coverage if the policy is insufficient.

Disability insurance comes in two types: short-term and long-term.

  • Short-term disability – This coverage replaces a portion of lost salary in the event the policy owner misses six months or less of work. The coverage typically begins after all sick leave is exhausted, and replaces close to 100% of wages for the first payouts. If the policy owner remains unable to work, however, the payments will eventually drop, often to 60% of wages. The length of coverage and payment percentage vary from plan to plan, but these numbers are typical.
  • Long-term disability – Some experts contend that long-term disability insurance is the most important insurance you can purchase. This can be partially attributed to advances in medical care; some diseases and injuries are now disabling rather than deadly, meaning that the incapacitation can be lengthy.

Typically, long-term disability insurance can be purchased to replace 50-70% of salary. Some employers allow employees to purchase extra insurance from the same company, sometimes raising the total to 80%. Note, however, that some policies have monthly maximum payouts, which may reduce the actual percentage of salary the policy owner receives. The “salary” is set at the time the policy is purchased, and you will likely want to increase the value of the plan as your compensation increases. Some plans only allow increases with a physical, some allow increases without a physical for the first few years of the plan, and some have other rules; check the plan for its particulars.

Long-term disability policies vary in the length of payout: some policies will only pay out for 5 or 10 years, some will pay out until age 65. Experts recommend the latter. Policies also vary in definition of disability (some contentious categories include mental illness and back injuries) and exclusionary criteria (pre-existing medical conditions, injuries from dangerous activities, etc.).

Policies can be ‘guaranteed renewable’ and ‘non-cancelable.’

  • Guaranteed renewable means the insurance company cannot drop the policy, unless premium payments are skipped.
  • Non-cancelable means the insurance company can never raise the premium on the policy. Both are desirable, but non-cancelable is usually best.

There are a few important policy options (or “riders”) that should be considered: “residual benefits” and “cost of living” (COLA).

  • The residual benefits rider provides the difference between old and new salaries, in the event that the policy owner can get a new job, but not one with the same salary as his old one.
  • The cost of living rider allows the policy’s value to increase with inflation.

Finally, a disability policy can be designated as an “own-occupation” policy. Most policies are “any-occupation,” which means the policy owner must work when he is capable, even if not in the same capacity as before. An “own-occupation” policy will allow the owner to collect benefits until he can resume the previous occupation. Typically, these policies are more beneficial to policy-owners with high-skill or high-paying jobs.

Social Security

Social Security is not a replacement or surrogate for disability insurance; at the most, it should be a last resort for those who can’t get private coverage. Not everyone is eligible for Social Security benefits, even once disabled – the applicant must have significant work history, must have been unable to work for a year or more, and must not be able to work in any capacity.

Long Term Care Insurance

Spending a long time in a nursing home, or under home care, is not something people like to think about; nevertheless, as medical science increases the average life expectancy, a growing number of seniors are finding themselves unable to live independently. At the same time, extended nursing home and home health care is becoming extremely expensive, primarily due to rising medical costs. Long-term care insurance covers these expenses, and is something people in their late 50s to 60s should seriously consider purchasing.

Long-term care policies generally cover extended health care at home, nursing homes, or assisted-living facilities. However, policies do not necessarily pay out in the same amounts for each of these choices; most notably, policies tend to pay less for home care. Like long-term disability coverage, policies also vary in their eligibility criteria; in this case, the determination of when someone can no longer live independently. Experts say an ideal plan’s eligibility criteria includes cognitive impairment and inability to perform one or more activities of daily living, and does not require previous hospitalization or home care.

Policies vary in their length of payout, from a couple years to “lifetime.” Obviously a lifetime policy charges higher premiums, but not much higher – the typical nursing home stay lasts less than 3 years, meaning the risk of a lifetime policy to the insurer is not that much greater than a 2 or 3-year policy. Policies have a set amount of time between when care starts and when the benefits take effect (analogous to a deductible in other types of insurance coverage). The longer the waiting period is, the lower the premiums.

Finally, like long-term disability, long-term care policies can be “guaranteed renewable”, meaning the insurance company can not drop the policy. Most experts recommend a policy that is guaranteed renewable.

This article was brought to you by the InvestorGuide Staff Writers and Editors.

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2 Responses to “Understanding Disability and Long Term Care Insurance Policies”

  1. Thomas says:

    I have LTD insurance, and certainly hope I never get a dime in payouts, but as I am 62, who knows? Mind you, it is offered by my employer at a steep discount, which makes the decision to take coverage easier to make.

    But the long odds hits are the ones that need careful consideration Last June we got a tornado (ultra rare in this part of the country) – only an F-0, but it snapped a 100′ oak in the front yard and dropped half of it on the roof. I had always grumbled about homeowners insurance, but not anymore.

  2. B. Newton says:

    I have been on short term and long term disability insurance since 2012. The company said it was mandatory I apply for Social Security disability which I did and was denied twice, the insurance co said I had to appeal it and have a hearing which I did and just learned was granted my ss disability, and SS paid me the back wages for 2 yrs, now my insurance company is saying I have to repay them $19,000 of what SS is sending me. I paid a premium for the Long term insurance, I do not under stand why I should have to repay them anything. Have you heard of this and can you explain this to me.

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