A Closer Look At… Disability Insurance

Indeed, if you are below about age 50, the chances of you encountering a significant long term disability that disrupts your ability to earn a living is much greater than your chances of dying. Yet so many middle class people – the very class that relies the most on income from work – go without disability insurance coverage or are significantly underinsured.

Who pays you?

Look at disability insurance in the context of all your other coverages and risks: If you get sick or hurt, you have medical insurance. They pay the hospital. But if you have a significant medical issue – big enough to blow your insurance deductible, chances are good you’re going to be out of work for a while. And you may even need ongoing medical care – especially for chronic, rather than acute conditions.

When you can’t earn a living, who pays your rent or mortgage? Who pays your light bill? Who puts food on your table for yourself and your children? Let’s put an even finer point on it: Who pays your medical insurance premiums?

To take it further, what happens when you can’t work – or you lose your job because of your disability, and you can’t continue your medical insurance premiums?

Why, you get cancelled for non-payment.

And under federal law (HIPAA), unless you can find new coverage within 63 days, congratulations, you are now shopping for insurance with a pre-existing condition. Which will limit coverage for the precise treatments you need most for a year.

That’s why the vast majority of families need some disability insurance protection – whether they get it from their employer (benefits taxable to the worker) or buy it themselves (benefits usually tax-free): Disability insurance prevents medical setbacks from cascading into a series of other insurmountable financial problems for you and your family, and buys you time to recover, and perhaps retrain for another trade or profession.

Think of it this way: Life insurance pays your spouse and children. Medical insurance pays your doctor. Long term care insurance pays the nursing home. Only disability insurance pays you!

What disability insurance provides

Disability insurance (the agents usually call it “DI,” for short”) is designed to replace a portion of your income if you get sick or hurt. Typically, DI carriers will be willing to underwrite a benefit of between 50 percent and 65 percent of your pre-disability income. Hopefully that’s high enough to at least keep you in your home and keep the lights on, while still providing you an incentive to recover quickly and get back to the work force as soon as possible.

Disability insurers can’t pay much more than that, because no system of insurance can last long if customers would rather watch TV at home and collect benefits than go to work. That’s what we have welfare for. (I kid!! I kid!!!!!).

How To Buy It

Disability insurance, like other insurance policies, is a contract. As such, the specific language in the contract makes all the difference. Think of it: Life insurance is easy. In 99.99 percent of cases, either you’re dead or you’re not. Except for some possible exclusions at the margins (acts of war on some policies, death while committing a felony, or death while motorcycle racing when you wrote on your application less than 2 years ago that you didn’t race motorcycles), the payout of life insurance benefits is very clear cut.

But how do you define “disability,” and how do you determine, in iffy cases, where the injury or illness warrants paying a claim?

Take a look at your policy, or have an agent explain the policies they sell. Look at the specific definition of disability in the policy. There are two kinds of coverages: “own occupation” and “any occupation.”

“Own occ” policies pay out benefits if the injury or illness prevents you from working in your own occupation. “Any occ” policies pay benefits only if your condition prevents you from working in any occupation for which you are reasonably suited, given your employment history and educational background.

The one you want is “own occ.” That’s the one pays benefits under the widest variety of circumstances. But nothing in insurance is free… those policies pay more claims, so you pay a bit more in premiums.

Here’s what to be aware of: If you get disability insurance from your employer, it’s almost always “any occ.” Show a company two options for employee benefits and they will almost always pick the cheaper of the two options when they’re the ones paying the premium.

Underwriting

If you’re self-employed or the owner of your own business, you’ll probably want to invest in the “own occ” version. You don’t typically get “workers compensation” unless you specifically structure things so you are the owner-employee of your own corporation, so it’s DI or nothing for you. But underwriters take a hard look at your profession. They all want to underwrite lawyers and accountants, and few of them are eager to write policies for roofers and electricians. Premiums for blue-collar professions are much higher than for the white collar ones – simply because the blue-collar folks get hurt more. Even the owners get hurt more on the job than accountants.

Each company underwrites different occupations differently. For that reason, I believe the best way to look for individual disability insurance is to go through a broker who specializes in disability coverage, and who will shop your occupation out to many different companies at once. Different companies will underwrite your profession very differently and come up with very different rates. Using a broker maximizes your chances of making something close to the optimal choice.

That said, there are some excellent proprietary products sold through captive agent channels. You can do well with these as a white collar-type professional. If you work with your hands, you’re probably better off going through a disability brokerage.

Planning for the Child with Special Needs

Pretty simple.

But what if a child has a disability? Then it’s not so easy. In fact, planning for children with special needs is very different from planning for the “typical case.” It’s important to start laying the groundwork early on, and plan decades ahead.

The first issue is dependency. With most kids, you can kick them out of the house when they turn 18, when they finish high school, or when they finish college. They should be getting close to financially independent by then (though it’s tougher for that generation now than it used to be).

For your special-needs child, that period of economic dependency may not end with a college diploma. For many families, that economic dependency is going to be lifelong. Furthermore, you also need to plan to keep your child’s access to any government safety net mechanisms. It’s all too easy for a parent going-it-alone to make basic mistakes that could accidentally cause your child to be declared ineligible for vital assistance, like food stamps and Medicaid.

Life Insurance

The first issue to look at is life insurance. For most families without any disabled or special-needs children to worry about, a simple, no-frills term life insurance policy will do the trick. Keep the policy in force until the kids graduate. Take the money you save from lower premiums and devote it to college saving, retirement, etc. It’s not always optimal in the long run, but it will work, and accomplish the basics until the kids are grown.

For special needs children, though, the life insurance need isn’t just for a period of time. The need may be permanent, not temporary. The usual advice you get from financial “gurus” on TV (most of whom are anything but!) is dangerous when applied to families with special needs children. In this case, some form of permanent life insurance may be indicated.

Trusts

Your child is your baby now. Maybe she’s covered under your own workplace health insurance plan, maybe not. But if you have a child who will have a difficult time working when she reaches adulthood, you need to think ahead: She will likely be highly dependent on food stamps and on access to Medicaid for her health insurance. And here’s the rub: Both programs have strict guidelines on how much any benefit recipient is allowed to own before she is disqualified from receiving benefits.

In most cases, Medicaid cuts people off if they own over $1,700 to $2,000 in assets, depending on the jurisdiction. There are some exemptions, depending on your state, but that’s the basic range for financial assets.  If your state sets a $2,0000 asset cap, the second your child owns $2,000.01 or more in non-exempt assets, she’ll lose eligibility for benefits in future months – until she spends herself back down to the poverty level.

What does this mean?

She can’t inherit assets directly. If you name her as a direct beneficiary on a life insurance policy, she will immediately lose eligibility. And all that money you intended to go to her benefit will go instead to doctors, caretakers, support people, and medical costs or premiums – if she can get medical insurance at all. (We’ll see if the Affordable Care Act survives the election, and revisit the issue then.)

It also means you can’t use the usual UGMA/UTMA arrangement you might use with most children. That’s because assets in a Uniform Transfer to Minors Act account will become her property as soon as she turns age 18 to 21, depending on your state. When that happens, she will again lose eligibility for food stamps, Medicaid, and other benefits until she spends herself down to poverty again.

To solve this problem, most planners use trusts. We work with an attorney to set up a special entity to hold property on your special needs child’s behalf. The child doesn’t own it – the trust does. And because of that, the child’s personal assets can be held below the Medicaid qualification level, while all the rest of the assets are preserved for your child’s benefit.

When you pass away, the death benefit from your life insurance, along with any gifts you make to your child during your lifetime and any other assets you leave behind should go to the trust, not your special needs child directly.

Intestate Laws

Wills are nearly always important. They’re especially important if you have a child with special needs. If you die without a will in place, the courts must distribute your assets according to your state’s intestate laws. Basically, this is your state’s default setting on how to divide your assets among your heirs. Intestate laws take over if you don’t have a will – and if there’s no surviving spouse, they nearly invariably distribute assets directly to children at the end of the probate process.

This is a problem.

If your special needs child inherits money directly, that, too, could disqualify her from desperately needed government benefits – forcing her to spend down family assets instead.

Long Term Care

Many parents assume their adult children will be able to look after them as they reach their golden years and become more dependent on their children. But if your only child is a special-needs child, you may have to make other arrangements. Your special-needs child may love you more than life itself – but she might not be much help when you need help in your old age. So while I do frequently recommend long-term care insurance to middle and upper middle class families at risk of being devastated by long term care costs, it’s doubly important to take a close look at long term care planning. A long term care insurance policy – even a modest one – could prove vital in providing services that your special needs child just can’t provide.

If you have a child with special needs, please give me a call. Let’s take a good look at your situation, and make sure your hard-earned assets don’t get accidentally squandered because you inadvertently disqualify your child from Medicaid. And let’s make sure that your child gets all the support she needs – not just now, but many decades into the future.

An Introduction to Long Term Care Insurance and Planning Considerations

According to the National Clearinghouse for Long-Term Care, a federal depository of long term care information and statistics, the average cost of a stay in a nursing home in Oregon was $246 per day. That’s more than $89,000 per year – enough to totally swallow most pensions.

More than that, an extended stay in a long term care facility can force families to liquidate assets prematurely in order to pay long term care costs. It is not uncommon for the costs of chronic or custodial long term care to totally evaporate a family’s entire legacy.

Even if you or a loved one doesn’t need a skilled care facility, the costs of an adult day care facility – fairly low on the continuum of care – still averages $79 per day, statewide, as of 2010.

Assisted living facilities cost an average of $3,120 per month in Oregon.

Want in home care? That’s going to run you an average of $22 per hour, in Oregon, at today’s prices.

But bear in mind that long term care insurance you buy today will hopefully not pay a benefit for many years in the future.

Don’t Count on Medicare

Medicare doesn’t cover long term care, in any significant way. Medicare only covers about three months of care, and only for acute conditions as a result of a qualifying hospitalization. Medicare provides no coverage for long-term chronic conditions that do not require acute care.

Medicaid is a Last Resort

Many people are under the impression that the government must provide for their long term care needs. Under current law, that’s true: The State of Oregon does provide some limited long term care, under Medicaid auspices. But with some exemptions, Medicaid only provides benefits for those who have impoverished themselves first. Except for a small exemption for home equity, a small allowance for spouses still in the community and not requiring Medicaid benefits, and a few other items, you must pretty much spend yourself down to your last couple of thousand dollars in the world to qualify for Medicaid.

Specifically, you can keep up to $2,022 if you are single, and $21,912 if you are married. Couples with assets above $21,912 may be required to split their assets and spend down before becoming eligible for Medicaid assistance. You can also keep a home (though not a home with more than $500,000 in equity), a burial fund of $1,500, a modest family car, and some household goods and personal effects.

That’s about it.

Even if you have some home equity, the government will come seize your home after you’re gone, or your spouse is gone, to recoup as much of the costs of long term care as they can, courtesy of the Medicaid Estate Recovery Program.

Don’t try to circumvent the rules by giving away your assets. Under the terms of the Deficit Reduction Act of 2006, Medicaid officials have a “lookback” period of up to 5 years. Any gifts you made during this time are still counted against you for the purpose of Medicaid eligibility.

Receiving a pension? You’re in trouble, unless the pension is very small: If you receive too much money from any source per month, you could find yourself disqualified for Medicaid. Long term care is the beast that eats income – and then washes it down with an asset chaser.

Long term care insurance, then is an important part of retirement planning. Indeed, it’s vital for the middle class. Only the very wealthiest among us can afford to write a check for the tremendous costs of long term care. For the middle class to affluent and even well into the millionaire zone, you will need to plan carefully.

What Long Term Care Insurance Covers

Typically, long term care insurance provides a maximum daily benefit to offset nursing home or assisted living facilities. For example, a typical plan I see might be a $225 maximum daily benefit. That’s a benefit of up to $82,150 per year. If you have a 10 year cap, that’s a maximum benefit of $821,500.

You can elect plans that don’t cover in-home care (which cost a little less) to plans that cover a substantial portion of in-home care. This can be an important consideration because it gives the insured individual and his family choices. You may be able to stay at home with loved ones much longer with a little assistance during the day – possibly allowing family members to work – than you could without some assistance.

Usually, benefits kick in when you lose the ability to accomplish at least two of the usual activities of daily living: Bathing, dressing, eating, transferring, continence and toileting. Alternatively, benefits are payable if you need close assistance and supervision due to a severe cognitive impairment such as Alzheimer’s Disease or dementia.

In the weeks ahead, we’ll be taking a closer look at the various aspects of long term care insurance and planning, and the roles it can take in your life.

Do I Need Long Term Care Insurance?

In my view, it makes sense for most people to buy at least some coverage. It seems to be a good deal in the long run. You can tell because of the overwhelming trend of insurance companies that sell LTC policies – or which used to sell it – to either cease issuing new policies, or raise rates substantially. This tells me that the overall trend has been to underprice these policies significantly. And it’s no wonder – the risk is nearly impossible for actuaries and underwriters to predict.

I usually recommend buying an amount you can easily afford—and to start doing it young. It’s ok to have multiple policies. Indeed, in some ways, it’s advantageous. I do not recommend buying an amount you have to strain to afford, because a lapsed policy does you no good.

If you have a home, or assets to protect from Medicaid recovery agents, you should definitely give serious thought to buying a total benefit equal to your assets, at least. More on long term care partnership programs in a future column.

Use solid, highly-rated insurers with good track records, and keep things at a level you can afford.