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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?

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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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DrLefty
DrLefty
5 months ago

Interesting article. I’m an insurance man’s daughter and have always had ALL the insurance—life, umbrella, etc. We signed up for LTC policies in our mid-40s, which was certainly too soon, but it was affordable through our employers (we both worked for the state).

I’m now in my early 60s, still working, and just last year finally dropped my disability coverages (both short-term and long-term). I have rights to 6-9 months of fully paid medical leave if I get seriously ill, and in any case if that happened, I’d just retire. (If I stay healthy, I’m planning to retire at 65, but I could retire at any point now. I have a state pension coming, and my husband is already receiving his.) It took me a minute to realize I no longer needed disability coverage. I’d had it for decades.

Matt Christopher White
Matt Christopher White
5 months ago
Reply to  DrLefty

Thanks DrLefty and congrats to you on having things in order to retire when you’re ready! Realizing that disability coverage is no longer needed in this circumstance does seem to be something that’s not talked about very often and easily overlooked.

mytimetotravel
mytimetotravel
5 months ago

There is no silver bullet? I think a non-profit CCRC with a healthy balance sheet that offers Independent Living, Assisted Living and Skilled Nursing and promises (in the contract) not to throw you out if you run out of money looks a lot like one. I had disability insurance until I retired and stopped earning, and I will move to a CCRC next year. I am glad I haven’t spent decades paying premiums for LTC insurance.

parkslope
parkslope
5 months ago
Reply to  mytimetotravel

While I agree, for the most part, the entry cost is out of the reach of many. These facilities also aren’t usually an option if you have a sudden serious health care event, such as a major stroke or heart attack, before moving in that prevents you from initially living independently or in assisted living.

mytimetotravel
mytimetotravel
5 months ago
Reply to  parkslope

The entry cost can be high, but so can paying for LTCi, and the benefits of a CCRC are immediate and considerable. If you can afford one, you can probably afford the other, and with a CCRC you won’t have to haggle over the details. You are right that you need to move in while still healthy (although sometimes you may still be admitted if there is room), and you need to plan ahead – the CCRC I expect to enter next year has a four year wait list for a one bedroom unit and over ten years for a two bedroom. But LTCi is by definition planning ahead.

parkslope
parkslope
5 months ago
Reply to  mytimetotravel

I agree, but wanted to point out that CCRCs aren’t an option for most folks. For example, Florida has enough CCRCs for ~ 1% of its senior population. The long wait list times also require you to decide where you want to live years in advance (of course, you can forgo your deposit if you change your mind).

My 99-year-old mother has lived in a CCRC facility for 15 years. Now that she is in skilled nursing, her monthly fee, including meals, is $3,000/month which is $7,200/month less than what she would pay without the LifeCare discount.

The only negative is that all of her friends have passed and her health status is such that she wishes she could spend her remaining time in a facility closer to her children and grandchildren. She doesn’t live close to a major airport so visiting her is difficult. We have offered to move her but, despite being very lonely, she is proud of not having burdened her children and has decided to stay put.

mytimetotravel
mytimetotravel
5 months ago
Reply to  parkslope

I don’t know about Florida, but here in NC deposits are refundable, aside from a two or three hundred dollar processing fee. Typical deposits here are only $1,000. I do have a sizable (refundable) deposit on the unit I expect to occupy, but that is because it is in a building under construction. CCRCs seem to be subject to state regulation, so there could be significant differences.

bhagwan g
bhagwan g
5 months ago
Reply to  mytimetotravel

Coud you please let me know which CCRCs charge $1000 deposits with low refundable fees? Would appreciate the info

James McGlynn CFA RICP®
James McGlynn CFA RICP®
5 months ago

Excellent analysis of the reason for the policies. The hybrid LTC premiums have come down with the recent increase in interest rates. The negatives of stand-alone LTC policies are alleviated by hybrid policies. Premiums can’t increase and if not used there is a death benefit. Policies aren’t cheap but the risk covered is substantial.

Matt Christopher White
Matt Christopher White
5 months ago

Appreciate it, James. Thanks for reading! Yes, I have been hearing more and more about the hybrid policies.

Paula Karabelias
Paula Karabelias
5 months ago

A lengthy elimination period, limited timeframe when LTC benefits end, and maximum of 200 a day? And likelihood of ever escalating premiums or cuts in benefits ? Add to that many instances of patients having difficulty getting claims paid and having to sue . A decent nursing home where I live is almost 500 a day. I think I’ll take my chances on self insurance. Out of many dozens of elderly and disabled people I’ve known , only two had long nursing home stays beyond what Medicare provided.

Last edited 5 months ago by Paula Karabelias
Matt Christopher White
Matt Christopher White
5 months ago

All good points, Paula. I’m also leaning toward the self-insurance option.

wtfwjtd
wtfwjtd
5 months ago

Exactly. And like all other insurance, if and when you try and file a legitimate claim, your insurance company becomes your worst enemy. Check that policy carefully, as it squirms with so many catches, exceptions, and loopholes that you’ll have a steep hill to climb when you have to sue to get the insurance company to pay what they’ve promised in those slick advertisements. LTC and Disability Insurance are some of the worst types of insurance in this regard.

Mik Cajon
Mik Cajon
5 months ago

My concern with both LTC and disability insurance is the escalating premiums…eventually becoming unaffordable when needed most…game over.

Last edited 5 months ago by Mik Cajon
R Quinn
R Quinn
5 months ago
Reply to  Mik Cajon

You’re right, my LTC premiums increased 45% last year and another 26% this year. I’ve had the policy for 33 years so it’s a tough choice between dropping it and high premiums. Insurers want you to drop the coverage because generally they are losing money. I was offered a sort of buyout, but it wasn’t worth it now.

Guest
Guest
5 months ago
Reply to  Mik Cajon

BINGO Mik. If I decide down the road to buy LTCI I expect I’ll get a policy that would only cover a portion of any expected costs and self-fund the rest.

R Quinn
R Quinn
5 months ago
Reply to  Guest

That’s no problem most policies don’t come close to covering full costs.

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