Long Term Care and Disability Planning:
Deborah M. Lavinsky
When one thinks of creating a financial plan for a client, investments and life insurance often come to mind. Without a doubt, investments are a familiar topic for most planners. Insurance, however, is a more difficult topic to broach. Let’s face it; no one enjoys talking about death, disability, or other disasters. This is where you earn your stripes as a planner, because this is precisely what your clients need hear to from you. Disability insurance (DI) and long term care insurance (LTCi) are important components to a sound financial plan because they protect your clients’ most valuable asset—their ability to produce income and paying for their care in the event of a disability.
The National Business Group on Health (NBGH) warns that the increased occurrence of obesity and Type 2 diabetes costs the workforce an estimated $98 billion. In terms of lost work time, obesity and diabetes are associated with 39 million work days, 239 restricted-activity days and 63 million physician visits. One out of seven employed people will be disabled for five years or more before age 65, the average long-term loss due to disability is more than five years, and the average American household only has two months worth of savings in reserve. Disability is the cause of 48 percent of mortgage foreclosures; only two percent due to the death of a breadwinner.
Long term care and disability insurance are confusing products for both professionals and consumers. Unlike term life insurance which provides a basic death benefit, both LTCi and DI offer a myriad of options and benefits, very similar to a Chinese menu. Understanding the terminology and jargon is difficult and it is nearly impossible to compare “apples to apples” with policies from different companies. This article will provide some planning tools, adding value to your practice while giving your clients peace of mind.
What is the definition of disability insurance companies use to determine benefits? There are three basic types- Own Occupation, Modified Own Occupation and Gainful Occupation.
Own Occupation is the most comprehensive definition of total disability available. This type of policy will have a definition that says:
The inability to perform the material and substantial duties of your regular occupation, the insurance company will consider your occupation to be the occupation you are engaged in at the time you become disabled, they will pay the claim even if you are working in some other capacity.
Own-Occupation disability insurance is the only plan that does not penalize somebody for going back to work in a different occupation while on a claim.
Modified Own-Occupation has become the most common definition of total disability in the industry today. Most insurance carriers that have stopped offering own occupation disability insurance have moved to an income replacement definition: Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, and are not engaged in any other occupation.
There is a major difference between an income replacement and an own occupation definition of total disability. The income replacement definition will penalize you during a claim if you make the decision to go back to work, or earn another source of earned income while on a claim.
Gainful Occupation—this definition of total disability is very common in an employer-sponsored group long term disability insurance policies. A typical definition will look like this:
Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, or any occupation for which you are deemed reasonably qualified by education, training, or experience.
Many people who merely shop for the best disability insurance rate end up with this type of coverage. It is quite simply the most limited policy available and should be supplemented with a quality contract if not replaced entirely. This definition basically leaves the determination of whether or not you are disabled up to the insurance company. How would you like to be told as a physician or CPA suffering from a stroke that you would still be able to work as a greeter at Wal-Mart?
It is important to choose a policy that is Non-Cancelable and Guaranteed Renewable. It guarantees that after you place a policy in-force there will be no changes to the premium, the monthly benefits, or your policy benefits to age 65 or a certain age.
Designing a policy involves making decisions on benefit period (how long the benefits will be received), elimination period (the out-of-pocket waiting period before the benefits are paid by the insurance company), adding a cost-of-living increase rider (inflation protection), future increase option (protecting future earnings), and residual disability rider (covers a loss of 20 percent or more of income).
Who needs long term care?According to the 2004 MetLife Mature Market Survey, over 1.3 million patients received home health care services in 2000, with over half receiving help with one activity of daily living, seven in 10 were age 65 or older, and 65 percent were women. The average private nursing home rate in 2004 was $169/day; in Tucson it is $191 per day. The average hourly rate for a home health aide is $19. That can add up to over $200 per day very quickly.
Case design with long term care insurance is very similar to that of disability insurance with a few differences in riders. A rider gaining popularity is one that pays an indemnity or cash benefit each month in addition to the reimbursement benefits. This cash benefit has the flexibility of allowing the insured to spend that money on whatever the policy doesn’t cover—prescriptions for example.
There have been new products brought to market that are worth noting. The most common objection to obtaining LTCi is that “I won’t need it, I am healthy”. In those situations, there are single premium life insurance policies that offer an accelerated death benefit that can be used to pay for LTC benefits. From a tax standpoint, a taxable account (CD) can be moved to the life insurance. The interest in the life insurance is tax-deferred and the death benefit is received income tax-free. Whatever isn’t used for LTC will go to the beneficiaries.
Affordability is another common objection. For C-corporations, LTCi can be 100 percent tax-deductible and the owner can choose who receives benefits. These plans can be set up to benefit executives and premium payments can be accelerated.
Obtaining LTCi and DI policies will accomplish several goals for your client. Income will be protected in the event of a disability, care will be provided without exhausting retirement plan or investment funds, and their estate will be protected for the next generation. Remember, one of your goals as a planner is to help your client accumulate and preserve wealth. Let’s hope that they never need to collect on their LTCi or DI, but if they do, you’ll be the hero if you were wise enough to encourage them to procure these types of coverage while they are healthy.
Deborah M. Lavinsky, Kokopelli Financial, LLC, assists her clients with accumulating, protecting and transferring their wealth so that they can have a happy and secure lifestyle. Contact her at (602) 795-4934 or deb@kokopelli financial.com.
