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Insurance Foresight-Disability Income and Long-term Care Insurance

May 1, 2007
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One of the most frequent insurance topics my clients enquire about is disability insurance. Clients want to know whether it is the same as long-term care insurance. The answer is very simply NO. Disability income insurance and long-term care insurance are two very unique insurances.

In this column, I aim to explain the differences between disability insurance and long-term care insurance as well as the likelihood of disability and/or long-term care and their financial risks, the sources for disability income and the coverage provided by disability income insurance.

Disability Income Insurance

The following information from the “Guide to Individual Disability Income Insurance” published by America’s Health Insurance Plans (AHIP) should serve to inform you of the coverages offered by these types of insurance, and help you to decide whether you need disability income insurance, long-term care or both. (This guide is available online at www.life-line.org/GuidetoDI-2005.pdf.)

Many people looking into disability insurance want to know how likely it is that they will experience a disability that prevents them from working.

The risk of a disabling illness or injury that prevents a worker from doing his or her job is more significant than most people realize. According to the National Association of Insurance Commissioners (NAIC), a male U.S. worker at age 35 faces a one-in-five chance of disability taking him off the job for 90 days or longer during his working career. A 35-year-old woman faces a nearly one-in-three risk of disability lasting at least 90 days before reaching retirement. In fact, the risk of an extended disability during a worker’s career is greater than the risk of premature death.

As a precautionary measure to protect your financial status in such a case, you can purchase disability income insurance.

Disability income insurance provides you and your family with income should you become unable to work due to illness or injury. It helps protect against family financial catastrophe by providing income to meet financial needs during a disability.

Also, there are specific types of business protection offered by disability insurance.

Disability insurance is particularly important if you own a small business. In addition to standard disability income replacement, business protection is available through:

 Recovery benefits that pay after you return to work full time, during the period in which you are reestablishing a customer or client base.

 Overhead expense coverage that pays for certain office expenses.

 For jointly owned businesses, a disability buy-out policy disburses funds for one partner, or the business entity, to buy a disabled partner’s share of the business.

 Key-person insurance, which protects a firm against the loss of income resulting from the disability of a key employee.

When purchasing a disability policy, you must know what the policy does and does not cover. Some policies pay only for disability arising from accidents but not illnesses. However, illnesses are a frequent cause of disability. In fact, as you get older, it is more likely that you will need to be covered for an illness than for an injury. Be sure to carefully consider the kind of protection that is best for you and your family.

It is important to remember that insurance policies are legal contracts. Read and compare the policies you are considering before you buy one, and make sure you understand all the provisions. Marketing or sales literature is no substitute for the actual policy. Read the policy itself before you buy any insurance. Also, don’t be afraid to ask your insurance agent to explain anything that is unclear. If you are not satisfied with an agent’s answers, ask for a direct contact at the insurance company to speak to.

As you research disability insurance, I recommend that you use the AHIP checklist to aid your review of the different insurance packages you are considering for purchase:

1. How is disability defined? – inability to perform your own job? – inability to perform any job?

2. Does the policy cover accidents? – illness?

3. Are benefits available for total disability? – for partial disability? – for residual disability? – only after total disability?

4. Are full benefits paid, whether or not you are able to work, for loss of sight? – speech? – hearing? – use of limbs?

5. The maximum benefit will replace what percentage of income?

6. Is the policy non-cancelable, guaranteed renewable, or conditionally renewable?

These are the first six questions on the AHIP checklist; you can visit the online version of the guide for more questions. In addition, you should take tax considerations into account when purchasing or receiving a disability income policy. According to AHIP, “In general, if you pay the premiums for an individual disability policy, payments you receive under the policy are not subject to income tax. If your employer had paid some or all of the premiums, some or all of the benefits may be taxable.”


Long-Term Care Insurance

In addition to disability insurance, you should also consider adding long-term care insurance to your retirement plan. Long-term care insurance covers assistance and supportive services at home or in a facility to those who are not able to care for themselves due to an injury, chronic illness or severe cognitive impairment, and includes help with what are called activities of daily living: eating, bathing and dressing.

There are a variety of reasons why people buy long-term care insurance. Health insurance does not cover long-term care services, nor does disability insurance. Also, Medicare offers very little long-term care coverage. Other factors that lead people to purchase long-term care insurance include their desires for control, independence, access to quality care at home or at a facility, and their wish to avoid creating financial and emotional burdens for their family.

According to one of my colleagues, Michael J. Bailey, a senior long-term care insurance specialist at Genworth Financial, “The likelihood that you may need long-term care is high.… While long-term care includes a broad range of services, from in-home care to nursing home care, each comes at a cost. Those costs could be substantial, and could have a significant adverse effect on your retirement portfolio.”

Bailey continues with a hypothetical example to show how expensive long-term care can become:

A couple is living off the interest of $500,000 of invested assets. Assume the couples’ investments are earning approximately 8% annually, generating about $40,000 in annual income. Also presume this couple needs all of this income to support them while they’re living together in their home.

Based on an $80,000 annual cost for nursing home care, it may appear that this couple has enough for a little more than six years of care. However, that basic calculation does not consider the living expenses of the spouse who remains at home. If this couple is using all of its investment income to provide for its living expenses, the partners may soon need to start withdrawing from the principle for a portion of those living expenses as well as for the long-term care expenses of the partner who needs care.

In circumstances like these, it’s easy to see how the assets accumulated over a lifetime could soon be completely exhausted.

Long-term care insurance can help provide the funds to pay for the care you may need, while simultaneously protecting the assets you’ve worked a lifetime to accumulate. Long-term care insurance may also help preserve financial independence, choice and dignity, and those can be priceless.

If an employer contributes to the premium cost of long-term care for eligible employees and dependents pursuant to a plan, the contributions will generally be excludable from the employee’s income and generally deductible to the business. The exact rules vary according to the legal status of the business entity.

Whether you have already checked into long-term care insurance, or know nothing about it at all, you now have the opportunity to learn about this important coverage and get the answers to any questions you may have.

Ask for a summary of the policy’s benefits and outline of the coverage. Good agents and good insurance companies want you to know what you are buying. For more information and a complete appraisal, contact your insurance professional.

This material is intended for informational purposes only. Readers are advised to compare the actual insurance forms to determine how coverage would apply to their situations. If you have specific insurance questions, the best source of advice is a licensed insurance agent.

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