When I meet people and tell them I am a financial advisor, the first thing they always want to talk about is the stock market. As a lifelong student of stock market history and behavioral finance, I am always happy to engage with people on these topics. However, as we always remind our clients, there is so much more to financial well-being than simply how the stock market is performing. One area that often gets neglected is insurance planning. People do not enjoy imagining bad things happening to them, but it is important to be prepared for the worst by being properly insured. While insurance can be expensive, the cost of not being insured can be far greater. It is worth taking the time to evaluate your insurance needs and find the right policy, and then hope you never have to use it. Two types of insurance to consider as part of your overall financial plan are long-term disability insurance and long-term care insurance. Below are brief summaries of each to provide you with an overview. For a more in-depth analysis based on your specific circumstances, we recommend you contact a financial professional. We are happy to help you or anyone you know with this, so please reach out.
Long-Term Disability Insurance
According to the Council for Disability Awareness, 1 in 4 of today’s 20-year-olds will become disabled before they retire, and 1 in 8 workers will be disabled for five or more years during their careers. These statistics serve as a good reminder of the importance of having long-term disability insurance, especially since a disability could prevent you from earning a living for a significant period of time. Sometimes people think only workers in high-risk, dangerous occupations should pay for disability insurance, but many claims are not actually caused by the job itself. Common reasons for disability claims include:
- Foot, ankle, and hand disorders
- Neck and back pain
- Muscle and tendon disorders
The average long-term disability is nearly three years. If you suffer a disability that prevents you from working, a long-term disability insurance policy can provide you with income for as long as you are unable to work, or for a set number of years stated in the policy (often 2, 5, or 10 years, or until ages 65 or 67). The amount of income is a percentage of your salary (anywhere from 50% to 80%). Policies can have different features and riders, which will affect the level of coverage and premiums paid. For instance, if you have a strict “any occupation” policy, your disability would need to prevent you from working in any capacity in order to receive benefits. If you have a more lenient “own occupation” policy, the premiums will be higher, but you would receive benefits if you simply could not work in your preferred, existing field.
Many employers offer group long-term insurance as part of their benefits package. If you buy insurance this way and pay the premiums with after-tax dollars, you would not have to pay taxes on your disability benefits. If your employer pays for the policy, most likely with pre-tax dollars, you would have to pay income taxes on the benefits. You can also buy an individual policy on your own if one is not available through your employer, or the employer’s plan is not enough for your needs and you need more coverage. The bottom line is, if you do not have adequate savings or resources to cover your income in the case of a serious disability, you should have long-term disability insurance.
Long-Term Care Insurance
So much of financial planning involves addressing different needs for different stages of life. While long-term disability insurance addresses the need for income replacement to help cover a significant disability, long-term care insurance can help cover the costs of assistance with routine daily activities for the elderly. These costs can really add up in a hurry! According to the Alzheimer’s Association, the estimated cost for care in the final five years of life is $367,000 for people with dementia and $233,000 for those without. Americans spend about $140,000 out of pocket on long-term care, on average. Most health and disability insurance does not cover long-term care, but long-term care insurance does. Most policies will cover services rendered in your home, a nursing home, an assisted living facility, or an adult daycare center. A policyholder is generally eligible for benefits when they cannot perform two of the six “activities of daily living” (i.e. bathing, dressing, getting in and out of bed, eating, etc.). Benefits would begin after the elimination period, which is a certain amount of time (usually 30, 60, or 90 days) in which the insured has to pay for services out of pocket, after the onset of the disability. A typical, bare-bones long-term care insurance policy will cost a 65-year-old about $3,750 per year in premiums and would provide about $160 per day for nursing home care (according to the American Association for Long-Term Care Insurance). While this may not cover the whole expense, it could go a long way towards protecting a retiree’s nest egg. One thing to beware of though is that premiums can increase after you buy the policy.
The ideal timeframe for buying a long-term care insurance policy (if at all) is much narrower than for long-term disability insurance. If you buy a long-term care insurance policy too early, say before age 50 or 55, you could pay so much in premiums before you would likely need to file a claim that it is not worth it. In this case, you could be better off investing the premium money yourself in an investment account and using the future appreciated funds to cover the costs of care. On the other hand, if you buy a policy too late, like well past the age of 60, your premiums will be higher. The ideal time for buying a long-term care policy is probably somewhere between the age of 55-60 for most people.
Deciding whether to buy a policy will require an analysis of your personal circumstances and retirement savings. If you can afford the premiums, and paying them will not impact your ability to continue saving for retirement, then buying a policy may make sense. If you are “self-insured” by having adequate retirement savings and could afford to spend roughly $150,000 – 250,000 on long-term care services out of pocket, it may not make sense to buy a policy. As mentioned above, determining the right insurance policies to meet your needs may require analysis by a financial professional. Preferably one who is a fiduciary without a vested interest in selling you an expensive policy. Please contact us if you have questions about long-term disability or long-term care insurance. We are here to help!