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Insuring Infirmity

Matt C. White

LONG-TERM-CARE insurance and disability insurance can both be part of a comprehensive financial plan. But is it a good idea to have both coverages at the same time, or could one substitute for the other? After all, both policies are designed to help those who are, in some way, infirm.

To answer this question, let’s start with another one: What’s the purpose of insurance? The best use of any type of insurance is to guard against financial disaster. It isn’t there to provide a discount on expenditures you could otherwise afford or to play a wealth-building role in your portfolio. There are more efficient means than insurance to accomplish these other goals.

Insurance is a game of chance. In terms of dollars exchanged, there will be a winner and loser on every policy. It will be the insurance company that wins more often than not. Actuaries pore over data to make sure of this.

Just remember, that’s okay. When a policyholder receives more benefits than premiums paid, that means the bad thing that no one wants to experience actually did occur. If the bad thing never happens, that’s cause for celebration. It’s also why, for insurance to do its job, you don’t need to get out more than you paid in.

What financial disasters are disability and long-term-care insurance intended to prevent? Disability insurance is there for those whose health problems take away their ability to earn income. Long-term-care insurance guards against a rapid drain of funds if you need assistance with the basic activities of daily life.

You don’t need disability coverage unless you and perhaps others depend on your ongoing income. You might need enough coverage to meet basic living expenses and service debts, such as a mortgage.

Long-term-care insurance can bolster your confidence by knowing you will always be cared for. You also needn’t fear running out of money and being forced into an undesirable care situation, such as being in a facility that accepts Medicaid but doesn’t meet your expectations.

These two insurance coverages are opposite sides of the same coin. Disability insurance helps make sure you get the money you expect to earn but haven’t yet. Long-term-care insurance helps you keep more of the money you already have.

The benefits are calculated differently, as well. Disability coverage provides replacement income figured as a percentage of your wages, perhaps 60%. Long-term-care coverage offers reimbursement for care expenses up to a daily maximum, such as $200 a day.

In both cases, if you file a claim, typically a medical professional will be called in. What will he or she be looking for? When it comes to a disability policy, you must know which definition of disability you’ve signed up for. An “any occupation” definition means you won’t receive a benefit unless you are deemed unable to work a job of any kind.

By contrast, an “own occupation” policy will pay your benefit as long as your disability prevents you from employment in your specific field. This can be a dramatically more favorable standard for the insured, especially in a high-income field.

Long-term-care insurance requires an entirely different assessment. What matters is whether you display cognitive impairment or can perform six activities of daily living, such as the ability to get dressed, feed yourself, and walk or move around. Typically, if you’re unable to do at least two of the six activities, you qualify for benefits.

Make sure you understand how long you’ll have to wait for benefits to begin. Sometimes, the elimination period can last for months. It’s also important to know how long benefits can continue. Is it for one year or five?

Now that you know the fundamentals, let’s return to the question at the top: Is it a good idea to have both coverages at the same time, or could one substitute for the other?

Because the two policies are designed to protect you from two separate financial catastrophes, long-term-care insurance usually isn’t a true substitute for disability insurance. Still, if you worry more about preserving the wealth you already have than about having more years to keep earning it, that’s a sign that you’re adequately self-insured against the loss of income due to disability.

In that case, shopping for a long-term-care policy might be your cue to drop your disability policy. Remember, even without a disability policy, you may still be covered by Social Security disability insurance or by a group policy through your employer.

Are there good reasons to keep disability insurance, while also adding a long-term-care policy? I can think of three:

  • Maybe you started a family later in life, and want to backstop your income until your kids are no longer dependent.
  • Maybe you invested the time and money in a late-career change and want to hedge against the risk of not having enough years of income from your new job to see a satisfying return on your investment.
  • Perhaps you have a target inheritance amount you’d like to leave your heirs, and you’re counting on several more years of income to make that happen—working years that could potentially be lost if you suffered a disability.

If you do buy both, just remember that for anything these policies are designed to cover, you and other policyholders will be footing the bill. The insurance industry isn’t in the business of giving away financial security. The math has to work—and, if it doesn’t at first, insurers will adapt to make it work.

There’s no better example of this than the initial mispricing woes of traditional long-term-care policies. Companies underpriced the coverage in the early years. We’ve seen changes to policies—and reductions in participating carriers—ever since.

What’s the outlook for long-term-care insurance? Some are optimistic that higher interest rates will soon help make the policies more attractive to providers. Earning anything more than the recent, near-zero rates on reserves will help insurers.

But high inflation will provide a headwind for them as well. If long-term-care policies don’t appeal to you, there are other options for planning for care, including new types of life and annuity coverage. But, alas, there’s no silver bullet.

Matt Christopher White is a CPA and CFP® who writes about money and apprenticeship to Jesus. You can get his book “How to Love Money: Four Paradoxes that Breathe Life Into Your Finances” at MattChristopherWhite.com. Matt is equally comfortable talking about Luke 6:43, Section 643 of the Internal Revenue Code and the 6-4-3 double play. There’s no place he’d rather be than with Sarah and their two girls, Lydia and Eliza, at their home in the foothills of the Smoky Mountains. Follow Matt on Twitter @WriteMattWhite and check out his earlier articles.

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