The Disability and Long Term Care Insurance Disconnect
When it comes to understanding the need for life insurance, most people are pretty clear. They understand that if they die, their family will need some kind of protection. If they die while owning a life insurance policy, the insurance company will pay their beneficiary a lump sum of money. There is no expectation that the government will provide any benefit for them. If they want to have it, they better make arrangements to obtain it on their own.
The same cannot be said for Disability and Long Term Care insurance. The two respective industries have been trying to promote the facts through public awareness programs; however there is still a vast array of misconception when it comes to these two particular types of coverage. Let’s examine the facts vs. what many people believe to be true.
Disability Income Protection
When the topic of disability insurance is discussed, the number one reason people contend they don’t need it, is the belief that Social Security disability will provide for them if they cannot work due to a disabling illness or injury. The truth of the matter is that according to the Social Security Administration, the average Social Security disability payment is under $1200 per month. This would be the equivalent to a disability income benefit of someone making approx. $21,600 per year, which is barely above the federal poverty level for a family of three.
Private disability insurance, often called DI or disability income insurance is a form of insurance that insures one’s ability to earn income. It is designed to protect against financial ruin resulting from a disability that prevents a worker from being able to complete the core functions of their job. This includes both physical and mental disorders. It is not designed to make a person 100% whole, or for them to be in a financially better position than they were before the disability occurred. The idea is to provide a means of support, while allowing rehabilitation and incentive to return to work. Therefore there are limits as to the amount of benefits that a person can qualify to collect.
Disability insurance can pay both short-term, (“STD”) as well as long-term (“LTD”) benefits. Statistics provided by the National Treasury Employees Union, show that:
- In the U.S. a disabling accident occurs on average once every second.
- Approx. 18.5% of Americans are currently living with a disability.
- One out of every four persons in the U.S. workforce will suffer a disabling injury before retirement.
According to a 2015 article in the Insurance Journal, currently 56% of all American workers have no long term disability coverage. In 1994, seven leading insurance organizations founded Life Happens. Life Happens is a nonprofit organization dedicated to helping Americans take personal financial responsibility through the ownership of disability and long-term care insurance. Both industries have adopted respective months, dedicated to their awareness. May is for disability and November for LTC.
Long Term Care Insurance
What exactly is Long Term Care Insurance (“LTC”)? When someone talks about LTC, there is much confusion between the difference between LT, and Medicare. Many people believe that once they qualify for Medicare, any and all long term care expenses will be covered. The truth is, Medicare only covers LTC for short periods of time, such as rehabilitation after an injury or illness. Once an individual is deemed recovered, Medicare does not pay any more. This doesn’t necessarily mean that an individual is back to 100% of the way he or she was before they were hospitalized. It just means that the doctors believe that an individual has medically recovered. Now, it’s a matter of rehabilitation, and there are strict limits as to what Medicare will cover.
Medicare does not cover assistance with activities of daily living (ADLs) that many older adults need to maintain their independence. There is something called Medicaid (Medi-Cal in California) but it will cover nursing home and convalescent care only if the individual’s income is below a certain level, and after an individual has used his/her savings.
The biggest stumbling block to LTC insurance is the negative association with aging, and with nursing homes. People do not like to talk about, nor think about getting older, and having to live in a nursing home. What people don’t realize is that many current LTC policies have a home care benefit, which is designed to help keep them out of a nursing home. Policies can pay a home care benefit of up to 100% of the nursing home benefit. That means if someone purchased enough benefit, the money can be available to bring a licensed professional into their home to care for an individual 24 hours a day, seven days a week, if needed.
This has had a huge impact on the quality and length of life people have had while receiving care. Elder Web, an award-winning online elder care source book, maintains that back in 1999, overall average length of stay for an elderly person living out the rest of their life in a nursing home, was 901 days, which is 30 months or about 2.5 years. However, when people had the capability to be discharged to their homes, the statistic drops to 388 days, or just over one year. In 2014, the American Association for LTC insurance stated that the average length of a LTC claim paid by and insurance company is 3.9 years. This tells us that people with the capacity to receive their care in home, are staying in nursing homes 1.5 years less, and living at home 2.4 years longer.
So while having the coverage will not decrease the need for care, statistics say it will shorten the length of time in a nursing home, while lengthening the life of an elderly person, and providing them the option of being able to live out their final days in the comfort of their own home.
The other misconception is that LTC insurance is only for older people. Many consumers would rather wait until they are older to purchase it. However, while it is true that the majority of people on claim for LTC are over the age of 80 (63.7%) 25.4% are between the ages of 70-79, and 10.6% are between the ages of 50 and 69, according to the American Association for LTC insurance. American Association for LTC goes on to state that in 2014, 71% of the claims that were opened, contained some kind of in-home care benefit.
The other problems associated with waiting until someone is older to purchase LTC are cost and health factors. Not only can the cost skyrocket after the age of 70, but if someone develops a serious health condition, it could prevent them from qualifying for LTC insurance no matter how much they are willing to pay.
Just like with any good financial or business planning, there is not always an obvious right or wrong answer. Every company and individual must determine what is best for them. It is always a good idea to discuss these types of coverages with a trusted insurance advisor, and make certain that all of the options have been reviewed. It is good to have a plan, because things don’t always go as planned.