Disability Insurance

Disability Insurance
Aside from health insurance, disability is a very critical type of insurance individuals should consider having. When it comes to your personal finances, long-term disability can have a devastating effect if you are not prepared. Think about this: the probability of becoming at least temporarily disabled during your working years is higher than the probability of dying during your working years.

Disability insurance can replace a portion of the salary you were making before you became disabled and unable to work after a serious injury or illness. But before you seek coverage, you should first understand the different types of disability definitions used by insurers.

Definitions of Disability
Different policies offer many characteristics and definitions for disability including:

Any Occupation: 
This is the strictest definition in which the insured is considered disabled only if he or she is unable to perform any duties pertaining to any occupation.

Modified Any Occupation:
Disability applies only if you are unable to perform any duties pertaining to any occupation for which you have been trained, received education or have work experience.

Own Occupation:
This is the most flexible definition for liability. You are deemed to be disabled if you are unable to engage in the principal duties of your own occupation. Most insurance carriers are doing away with this definition.

Split Definition: 
This definition can be within one's own occupation for a specific time period or with any occupation after the maximum benefit period has passed.

 Loss of Income: 
This definition avoids the problem of having to determine partial or total disability. A policy with this definition pays the insured in the event of loss of income due to illness or injury.



The Impact of Disability Definitions
How your disability policy defines disability will influence many things including:
 When you are eligible to receive benefits
 How much the policy will cost - the stricter the definition, the higher the cost
 How long the benefits will last

Obtaining Coverage
You can obtain disability coverage on your own or through your employer. Disability polices tend to be cheaper and have simpler underwriting (if any) than individual policies. Many of these policies have dual definitions of disability and others have restrictive provisions. Most group policies offered through work usually end after you leave your employer, or may only pay benefits for a specific amount of time or have caps on the amount of monthly benefits you can receive (ie. max of $5,000 per month). If the employer pays the premium, the benefits are taxable income to the employee. If the employee pays the premium, then the benefits are tax free.

Disability insurance providers rate their premiums based on your job and the level of risk involved in doing that job. Moreover, certain risky careers - skydiving or deep-sea diving instructors, roofers, etc. - may not even qualify for coverage.

Other factors to consider when obtaining coverage include: 

Elimination Periods: This is the amount of time you have to wait before benefits are paid after your disability begins - the longer the elimination period, the lower the premiums. The most popular elimination period ranges from 30 days to 90 days, but can be longer. This waiting period acts as a deductible, forcing the insured to bear part of the loss. Also important to remember is that payments normally begin 30 days after your elimination period has ended.


Probation Period: This is the time period a policy must be in force before it covers the insured for specific perils such as undisclosed pre-existing conditions. This protects the insurance company from selling a policy to someone who is ill or recovering from an illness or other condition.

Disability Insurance Riders:
As with any type of insurance you can add additional features to your coverage for an additional premium. These may include:

o Guaranteed Insurability: This rider guarantees your right to purchase additional disability insurance on specific dates or occurrences without having to show that you are in good health, but only that your income is sufficient to meet the underwriting requirements.

o Cost of Living adjustments (COLA): This rider increases policy benefits by a certain amount annually to match inflation, usually equal to the percentage increase in the Consumer Price Index, subject to a maximum specified in the contract (ie. 5%). The cost of living adjustment increases usually happen after your disability begins and generally start after the disability has continued for a year. It is highly recommended that anyone owning or considering a disability policy purchase a COLA rider in order to help protect the value of the policy's real benefits each year.


Duration of Benefits
When talking about disability insurance there are two types of duration:

Short Term: This type of coverage provides coverage for disabilities of up to two years, but most policies pay up to six months on average.

Long Term: This type of coverage protects for a longer time period (on average more than six months), often until age 65 or for life. Certain exclusions may apply to disability policies that are worth identifying, and these may vary from policy to policy.

 Two-year maximum benefit period for mental or nervous disorders
 One-year maximum benefit period for alcohol or drug abuse related claims
 Exclusion for payment of disability claims if injury or disability occurred during the commitment of a crime
 Exclusion for disability claims resulting from an act of war. This is not very common, but may exist in certain contracts.


Long-Term Care Insurance
As our lifespans are extended, our family structures change and medical care improves, the need for long-term care will continue to increase. A great number of people over 65 will spend some time in a nursing home, assisted living or extended care facility. The cost of such care can quickly erode the assets of even the most well-prepared savers. The risk of outliving your money in this situation can be great, and one of the best ways to transfer this risk is to purchase long term care.

Long-term care (LTC) is defined as a need for assistance with some of the activities of daily living (often called ADLs). ADLs include functions that most of us perform each day, like eating, bathing, using the bathroom, dressing, transferring and maintaining continence. The need for assistance may be due to physical inability or mental impairment, such as memory loss, Alzheimer's or dementia.

The reason to buy long term care insurance is to protect your assets in case you need to pay for assisted living, home care or a nursing home stay. Long-term care insurance helps you pay for these services, which can be very expensive and, over time, can be financially devastating. A policy also ensures that you can make your own choices about what long-term care services you receive and where you receive them in advance.

Within the long-term care insurance contract, there are two broad levels of care outlined in the policy, including:


 Skilled Nursing Care: This is usually for someone with an acute condition that requires intensive medical attention for a period of less than 100 days. The two objectives of skilled care are to help the person with comfort and assistance if the situation is terminal or to assist the person during a recovery period.

 Hospice Care: This is the term used for the care provided to individuals facing a terminal condition, or who have less than six months to live. This care can be provided in a home or a facility.

 Non-Skilled Nursing Care/Custodial Care: This is for a person with a chronic condition from which he or she will not recover. This type of care is usually received at home or in assisted living facilities. This type of care lasts beyond 100 days, and even up to several years.

There are many settings in which long-term care can be administered or provided. The type of LTC policy determines where you can receive your services.


 Home Care: Pays for care in your home. According to "Long-Term Care Planning" (2007) by Allen Hamm, as of 2007, more than 10 million people received care at home and home care is projected to increase 178% by 2030.

 Facility Care: Pays for care in a facility, such as an assisted living community, adult day center, continuing care retirement community or nursing home.

 Respite Care: Pays for services that enable some relief (rest or vacation period) to family members providing care giving. This can be provided either in the home or at a facility.

Like other types of insurance policies, the cost of insurance coverage depends on the specifics of that coverage. Several factors can influence how much a policy may cost the insurer, including the place in which the care is received, the reason for care or severity of the patient/insured's condition, the geographic location of the care, the daily benefit amount, the elimination period, the time frame in which benefits will be paid, etc. One thing is certain: the actual cost for continued medical care is not cheap, with some nursing homes costing upwards of $75,000 a year for private rooms. The national average daily rate for nursing home care is $206 for a private room and $188 for a semi-private room ("Long-Term Care Planning" (2007) by Allen Hamm).

Who Needs It?
You may never need long-term care. But one thing is for sure: the need for care assistance dramatically increases after age 65. One study from the U.S. Department of Health and Human Services reveals that one in four people turning age 65 will spend one year or longer in a nursing home, and by the year 2020, 12 million older Americans will need long-term care. So, when should people consider buying LTC insurance and how are other assets considered? While anyone between the ages of 18 and 84 can probably buy long-term care insurance, if you are in reasonably good health, the younger you are when you acquire the policy, the cheaper it will be. On the flip side, the average age of people admitted to a nursing home is 83. That means you might pay for nearly 40 years before ever using the policy.

Types of Policies
There are a few types of policies available for consumers today. Most are known as "indemnity", "expense incurred", or "cash" policies. Indemnity plans are also called "per diem" policies that pay up to a fixed benefit amount regardless of what you spend (ie. you may spend more or less than the policy covers). Expense-incurred policies reimburse you for actual expenses incurred up to your fixed benefit amount, as defined by the daily benefit you purchased with the policy. With a cash-based policy, as long as the policy gets triggered by the ADLs, you will not be required to incur expenses to receive the benefits of your claim. So, for example, if you are being cared for by a relative

Final Considerations
The purchase of LTC insurance should not be a stand-alone decision and must be incorporated with all other planning. When considering the purchase of an LTC policy, you may wish to consider purchasing optional benefits. One such option might be to buy a policy that is guaranteed renewable. You don't want to be surprised should your health decline one day that your policy is not renewable. You should also consider investing in an inflation rider to protect the purchasing power of whatever daily benefit you purchase.

Typically, those who apply for LTC are given the option to buy a 3% or 5% inflation rider using simple or compound interest. Of course, compound interest at 5% gives you the best inflation hedge, but also costs you more money. Additionally, if you think there is any possibility that you may not use your benefits, you may want to consider a "return of premium" rider. Finally, given that the average stay in a nursing home is about 30 months, you may want to consider a policy that will give you benefits for a minimum of three years (this is referred to as a policy's maximum benefit period).