04 May Disability vs Long-Term Care

What’s the Difference Between Disability Insurance and Long-term Care Insurance?

Did you know that medical bills are partly responsible for approximately 2/3 of all bankruptcy filings? The American Journal of Public Health reported the primary issues are high healthcare costs and work absences due to illness or injury. 

This is why insurance is so crucial. Health insurance offers assistance to individuals by covering some of the expenses associated with medical treatment. Disability insurance offers financial support in the form of benefits. Benefits are paid out to individuals who find themselves missing a substantial amount of work due to illness or injury. 

Diving in further, an individual unable to function due to an accident or illness for an extended period can find coverage with a long-term disability insurance policy. This type of disability insurance compensates for your missed earnings by covering a portion of your salary for a specified length of time. Terms regarding benefit amount and length of the benefit period are determined and laid out in the policy agreement. 

There is another type of insurance coverage you may need to protect yourself from the potentially crippling effects of severe health problems – long-term care insurance. 

Long-term care insurance pays for the costs of care you may require if you are unable to or require additional assistance in caring for yourself. When a person can no longer perform at least two of the six “activities of daily living” or ADL’s.

Activities of daily living are: 

• Basic hygiene practices
• Getting dressed
• Eating
• Using the bathroom facilities
• Getting in and out of bed
• Walking around

Once it is determined that an individual is no longer able to perform at least two of these activities, long-term care insurance kicks in. A long-term care policy will typically cover the costs and expenses of necessary care that are not covered by the majority of health insurance policies. These expenses could include in-home nurse visits, extended stays in nursing homes or rehabilitation facilities, hospice care, or any other costs associated with performing these daily living activities. 

Because these costs easily add up, it is recommended to invest early on. You can buy long-term care insurance at any point in your life. Premiums, on the other hand, tend to rise dramatically with age. Applicants may also be denied coverage due to pre-existing medical conditions. 

Although long-term care insurance policies can benefit people at any age, they are most commonly used to help pay for the medical expenses of elderly individuals. However, long-term care insurance isn’t just for the elderly. Accidents happen and we may find ourselves in need of long-term care sooner than we anticipated. 

Main Difference Between Disability Insurance and Long-term Care Insurance 

Long-term care insurance and disability insurance are often confused. Both types of insurance provide coverage for your assets, but they do so in different ways. Though there are many parallels, there is one significant difference.

Disability insurance pays a percentage of your salary if you are unable to work due to an injury or illness. The qualified disability may be work or role specific (i.e., the policyholder is unable to perform their current job). It can also be general (i.e., the policyholder is unable to perform their current job, or any job). 

A long-term care policy covers either a portion or all the costs of providing care to someone who is disabled, physically or mentally. If you become unable to care for yourself, a long-term care policy is designed to cover the costs of required treatment facilities. For instance, long-term care insurance can cover a large portion of the costs of nursing homes, assisted living facilities, or in-home care. Additionally, long-term care policies can help offset the expense of hiring nursing or home health aides. 

Long-term care will reimburse the cost of at-home care, assisted living, or from a skilled nursing facility. Depending on the provider, policy provisions may specify an amount will be reimbursed for any day that qualified care is required (Indemnity) or any month that qualified care is received (Cash).

When to Know Whether You Need Disability Insurance or Long-Term Care Insurance

Disability insurance should be purchased as soon as you start working full-time, particularly if you have: 

• Dependents that are financially reliant on your salary. 
• Debt that you would have to pay even though you become disabled. 
• A well-paying career. 
• A work that necessitates professional abilities and cannot be done due to injury or illness.

According to the Social Security Administration, about 25% of 20-year-olds will become disabled before they hit the age of 67. Just 4.5% of Long-Term Care Insurance claims that were filed in 2018 were for people under the age of 70, according to the American Association for Long-Term Care Insurance. About two-thirds of the long-term care insurance claims filed were with policyholders over the age of 81.

Long-Term Care Insurance, on the other hand, is rarely needed at such a young age. At the same time, you don’t want to put off purchasing Long-Term Care coverage. The American Association for Long-Term Care Insurance states that 30% of applicants between the ages of 60 and 69 are denied coverage. Moreover, 44% of applicants between the ages 70 to 79 are rejected.

Factors that Determine the Cost of Care for Disability and Long-Term Care Insurance 

Disability Insurance and Long-Term Care Insurance both go through similar underwriting processes. The expense of both types of insurance is determined by policy features. 

When deciding whether you qualify for benefits and how much you will pay in premiums, all providers will take into account your age and health status. For those applicants who are young and healthy, you will likely pay less for both forms of insurance. Additionally, the cost of coverage for both is influenced by where you live. 

Disability insurance policy providers will evaluate applicants based on factors such as gender, occupation, and lifestyle. In most cases, these factors are not taken into account during the underwriting processes for long-term care insurance.

Individuals with disability insurance and long-term care insurance policies can choose how long their policy will pay benefits. This is referred to as the benefit period. Generally, the longer the benefit period, the higher your insurance premium will cost.

An elimination period, also known as a waiting period, is included in both insurance plans. This is the time period between when you apply for benefits and when you receive your first payment. Keep in mind, the shorter the waiting period, the more expensive your insurance will be.

Individual long-term care and long-term disability plans have optional riders that can help you get more out of your coverage. However, they will increase the cost of your insurance. 

One significant cost difference between the two policy forms is that, unlike disability insurance, long-term care insurance providers will increase your premiums after you’ve bought the policy. Insurance companies can’t raise the rates of only one or a few policies; they have to raise the rates of all policies in a given premium class. 

When are Benefits Paid?

Long-term care insurance and disability insurance policies pay out benefits in different ways and at different times. 

If you are unable to perform several tasks of daily life (ADL), such as washing, dressing, sleeping, walking, and using the bathroom, you may be eligible for long-term care insurance benefits.

Benefits from long-term care insurance plans can be paid in one of two ways: 

1. Expense-incurred plans pay out up to the full benefit sum for long-term care costs incurred by policyholders. The individual receiving treatment will file claims based on their expenditures.
2. Regardless of the expense of the service provided, indemnity plans pay a fixed dollar amount. During the waiting period, you can continue accepting insurance benefits until you have reached long-term care. 

Following the policy’s waiting period, disability insurance plans pay compensation if an accident or illness prevents or restricts an individual’s ability to function. Whether or not you are eligible for benefits is largely determined by how the policy defines disability. If an illness prohibits you from working at your regular job but encourages you to do other types of work that minimize your salary, certain plans will pay you a monthly bonus. Some plans will not pay out incentives if the affected individual is capable of working in a different sector, even if the income decreases.

The amount of compensation you receive is determined by a proportion of your pre-disability income and what, if any, income you collect after your disability. 

Cost of Long-Term Care Insurance

When compared to other forms of insurance, Long-Term Care Insurance can be costly. The average annual premium for Long-Term Care coverage is approximately $2,300. Furthermore, premiums can, and do, rise over time. Long-Term Care rates skyrocketed in the mid-2000’s when insurance providers underestimated the amount of valid claims they’d be responsible for paying. While the industry states that similar increases are unlikely to occur in the future, nothing is guaranteed. This makes budgeting for this form of coverage a challenge. 

Long-Term Care, on the other hand, will cost much more than your insurance premiums. The national average for a 12-month stay in a long-term care facility can cost up to $50,000. Long-term care insurance allows policyholders to choose how much coverage they want. Including the choice of receiving daily benefits, as well as how long the benefit period will last. For obvious reasons, as the benefits and coverage period increase, the policy becomes more expensive. 

Long-term care premiums are determined by the policyholder’s age and fitness. Younger policyholders will pay less than older policyholders. Married policyholders will pay less than single policyholders. 

Factors to Consider When Choosing Between Disability and Long-term Care Insurance

Number of years before you retire. Because private disability insurance usually expires at the age of 65, it is most useful as a safety net if you have a minimum of 10 to 15 years left to work. Long-Term Disability Insurance is the most underutilized form of insurance in the United States. However, it is also the most significant because it safeguards a person’s most valuable asset – their income. 

Your health. Disability Insurance policies may exclude pre-existing mental and physical conditions, depending on when they were diagnosed. For this reason, it’s important to accurately disclose your health status during the application process. Pre-existing conditions can also be a reason for an applicant to be rejected for Long-Term Care Insurance. So, if you are going to buy Long-Term Care Insurance, you should do it several decades before you think you will need it. 

Whether you can afford the premiums. The cost of long-term care premiums is dictated by a variety of factors. Including age, fitness, the duration of the policy, and daily payout. Disability benefits range from 1 to 3 percent of your annual salary. Lower-cost coverage may be available through an employer or professional organization. Long-term care premiums generally rise over time. You can purchase a non-cancelable disability policy with a level premium stipulation. This ensures premiums are fixed for the length of the benefit period.  

Hybrid policy. Instead of a conventional long-term policy, one can consider a life insurance policy with a long-term care rider. This means you may use a death benefit from a “hybrid” life insurance policy to pay for long-term coverage while you’re still alive. 

Riders. Disability riders allow for cost-of-living adjustments, partial disability compensations, and “own occupation” benefit payouts. This means the application will be processed regardless of whether you can work in a particular field. Riders available for long-term care insurance include increased cost of living, home health care, and assisted living care. 

Long-term Care and Disability Insurance may be difficult to understand. The policies force people to spend money they may not have on something they may not believe they will ever use. They make people consider the worst-case scenario. As a result, they’re easy to overlook and difficult to acquire. However, it is a good idea to have all forms of insurance. Otherwise, the financial consequences of these unforeseeable, yet statistically probable, occurrences can be devastating.