FAQs About Life, Disability, and Long Term Care Insurance
Long Term Care Insurance
There is only one answer to that question—NOW!
It’s not a certain age or if you’ve realized your assets will not be as much as you hoped. It is not when you’ve gotten a diagnosis or when someone in your family needs a caregiver’s help.
Now whether you’re in your 30’s or 60’s.
Now whether you are single or married.
Now before the insurance companies change their policies.
Now while you’re healthy.
Now because you’ve got better ways to spend your income.
Now because no matter what you pay in premium over the next 10 or 40 years, the total will be far less than the cost of care when you need it.
Now because you love your family and don’t want to burden them with caring for you.
There are many factors that need to be considered including age and health, the dollars available and whether there is a need for life insurance at death.
A stand alone long term care policy may have benefits and riders that a linked policy does not. It also has lower premiums.
However, linked life policies work very well if there is an early need for life insurance but not necessarily a need later in life. Linked products were designed for insureds that believe they’ll die before needing long term care and want to be sure that the premiums spent will go toward a life insurance benefit for their beneficiaries if not used for themselves for a long term care benefit.
Long Term Care Insurance covers custodial care when an insured is unable to do either 2 of 6 Activities of Daily Living: Eating, Dressing, Bathing, Transferring, Toileting or Continence; OR has a diagnosis of Cognitive Dementia or Alzheimer’s. These claims occur if there is an accident or illness.
The statistics point out that 70% of people over 65 will need long term care at some point in their lives. But long term care needs also affect young people due to car accidents and diseases like MS. This results in 40% of the population needing long term care under the age of 60.
Daily or Monthly Benefit.
When designing a policy…think short and fat. Short is the benefit period and fat is the daily or monthly benefit. It is much more useful to have a larger monthly benefit for fewer years than a smaller benefit for more years. For example, a “short and fat” monthly benefit of $9000 for a 3 year benefit period is better than $4500/month for 6 years. First because $9000/month may be the amount needed for care and secondly, because any of the benefit not used in the first 3 years is available for future years.
Inflation is an important feature to keep up with the future costs of custodial care. There are a number of different inflation options available but the broad categories are compound, simple, and an option to buy inflation annually. Inflation options chosen will depend on the initial amount of monthly benefits selected as well as age and budget.
Disability insurance is coverage that replaces lost income in the event of an accident or illness. Policies may cover you for 2 years, 5 years, to age 65 or longer depending on the benefits selected.
The definition of total disability is critically important when considering this type of insurance. The definition should be specific to your occupation and should state that you are unable to do the material and substantial duties of your occupation. A policy that states covers you in your occupation for 6 months or 2 years may not be sufficient. Residual/partial disability and future insurability riders are important to understand when applying for coverage. Financial verification and good health are both seriously considered in the underwriting process.
Yes but don’t rely on getting any money from your group policy!
Group policies are very inexpensive but not because the insurance company is covering a large group. They’re inexpensive and much less good for these reasons:
* You can’t keep this policy after you leave your job.
* When on claim, the payments are offset by compensation received from any and all of these sources–retirement plans, salary compensation, worker’s comp, social security, and federal and state disability programs.
The definition of total disability is poor. Group policies typically state that if you are able to work in any occupation, you will not be considered eligible for benefits.
These two types of insurance policies are often confused.
Disability Insurance is an income replacement policy. If an insured is unable to do the material and substantial duties of his/her occupation, a disability policy will replace the lost income. A disability claim is triggered when an insured cannot work. The insured can collect on his disability policy but may or may not need custodial care.
Do not get rid of that term policy until you find out the options for using that policy to fund long term care in the future. It may be worth keeping that policy especially if you have no other long term care insurance.
There are 3 basic types of life insurance.
Level term insurance
Universal Life Insurance
Whole Life Insurance
There is a place for each of these coverages in your portfolio.
Term insurance is often the product of choice for families with young children as a large amount of coverage can be purchased for a very reasonable cost. Term policies are typically 10,15,20,30 years of level coverage
Term insurance is frequently used to fund buyout agreements between partners. Term policies work very well for the specified period that partners determine they will own a business together. If one partner predeceases the other, then the surviving partner has the proceeds to buyout the heirs and become the sole owner of the business.
Businesses often use term insurance for key person coverage. If a key person dies prematurely, then the proceeds of a policy, will help the company become stable and hire staff to help replace the key person who passes away.
One of the most important features of term insurance is the ability to convert it into permanent coverage in the future. This benefit is crucial for people who have become uninsurable and need coverage for longer than the term period.
Universal life insurance is an extremely flexible product. It can be designed to last for whatever period of time desired. So it can work like a term policy or a policy that will last until death. The current policies often have guarantees so if the target premiums are paid the policies will last to a guaranteed age. There are still plenty of contracts that are not guaranteed and will vary with the interest rates that are projected in the policy. It is important with these contracts to get new illustrations every couple of years to monitor whether the policy is still projected to last to the desired age. Universal life products are very varied and it is very important to understand the policy that was purchased and be sure to monitor it though the years.
Whole Life Insurance continues to be a very popular and extremely versatile way to purchase permanent insurance coverage. These policies last until age 121. They build guaranteed cash value and have dividends which are a return of profits and not taxable. The cash can be borrowed if extra cash is needed at a certain point in time and paid back in the future. The cash build up can be used to supplement college costs and retirement. The policies have high premiums but over the years the cash build up is so high that the internal rate of return on the premium is very competitive.
Whole life is often used for businesses to fund salary continuation plans. Policies may be owned by an irrevocable trust so that they are out of the insured’s estate. Policies owned by an irrevocable trust are often used to reimburse estate taxes when one or both spouses die. These policies are also used to fund special needs trusts for disabled children.
Premiums for whole life policies may be paid forever or for a limited number of years. The versatility of whole life insurance and the permanence of these policies make them an extremely valuable asset in an insured’s portfolio.
That is one of the biggest areas of confusion with Universal Life Insurance polices. Some and mostly the newer policies are guaranteed to last to a certain age. Policies written in the 80’s, 90’s and early 2000’s were designed with projected interest assumptions often times with much higher projections than what has actually been credited to these policies. Insured’s absolutely need to request a current policy illustration to see how long their policies are projected to last. If the projection has the insurance running out before the insured desires then either the premium payments must be increased or the death benefits decreased to be sure to have coverage as long as it’s needed.
Variable life insurance is based on the performance of mutual funds and the stock market. It was designed for clients and financial advisors who wanted a life insurance policy to also be an investment tool. Unfortunately, the market has been very unreliable and many of these policies have not performed as originally hoped.
Variable policies must be reviewed and projected at new hyperthetical interest rates to understand how long coverage will last.
The government offers a subsidy on the exchange to insureds that qualify based on income. If eligible, there are many insurance companies and various products available all with differing options and networks.
Off exchange there are more policy options and no government subsidy.
In both cases, it is critically important to learn if the network offered is one that includes your doctors and hospitals. It is also very important to understand what is covered and what the out of pocket expenses that must be paid prior to reaching the maximum out of pocket limits.
Open enrollment is now through 2/15/15. This is the period of time for which you can get coverage for 2015. If you miss the deadline, you will not be eligible to have individual health insurance until 1/16.
Be sure to contact a health insurance broker or go to
www.healthcare.gov to learn what’s available. You may also call 1-800-318-2596.