Some of our members have expressed confusion about the differences between Long-Term Care Insurance (LTC), Long-Term Disability Insurance (LTD), and Critical Illness Insurance (CI). All three policies tend to be cheaper for younger, healthy persons, but then the similarities become harder to find.
None of the three insurance programs described below have any relationship to employer-provided medical insurance, which pays a benefit to cover a percentage of the cost of health care received, so long as the care is provided by appropriately licensed professionals for medically necessary procedures in approved facilities.
Long-Term Care Insurance (LTC)
LTC insurance is designed principally to provide a daily cash benefit to cover the costs of health care services provided in a nursing home, your own home, an assisted living facility or an adult day care facility. This type of insurance does not provide a benefit based upon one’s ability to work. Instead, it provides benefits based solely on one’s ability to perform or not perform certain daily functions. The average annual cost for nursing home care in the United States is $57,000, according to Phyllis Shelton in “Long-Term Care: Your Financial Planning Guide.”
The highest probability of needing care occurs in the last one-third of a typical life span, so the older you become, the faster the premiums rise. Probably the ideal time to purchase such a policy is when you are less than 55 years of age. You may qualify for acceptance even if your health is not perfect. However, you are more likely to qualify for a lower premium if your health at the time you apply is better than others of the same age. People who wait too long to apply may not be accepted because of their state of health and/or the need for assistance to perform the activities of daily living.
According to Michael Pinkans of National Life Insurance Company, 43% of all claims for LTC benefits are from people under age 65. If you wait until age 65, all premiums that you might have paid for 25 years from age 50 to 75 are likely to be significantly less than the premiums paid to the same insurer from age 65 to 75. This assumes you still qualify for acceptance at age 65, which is not guaranteed. Those insured from age 50 may be among the 43% who are making claims for LTC before age 65.
Here are some reasons to purchase LTC insurance:
- You might be able to afford LTC care for a few months, but not have enough savings to maintain an acceptable lifestyle for your dependents should you need continual assistance for several years to perform activities of daily living, such as bathing, dressing, eating and using the toilet.
- You have assets of $75,000 or more that you want to leave as an inheritance and don’t want squandered on long-term care expenses.
- You care about quality choices of LTC facilities and want to control how you receive your LTC care.
- You want to pay for your own care without becoming destitute.
- You can afford the premiums.
LTC insurance is probably not needed if:
- You have adequate resources to pay for your long-term care without impacting the lifestyle of your dependents.
- You are not concerned about leaving an inheritance.
- You are not selective about where you might receive long-term care.
- You have minimal savings and will quickly qualify for Medicaid assistance for LTC expenses.
- You cannot afford the premiums.
The cost of LTC insurance is related to such factors as:
- Amount of protection required
- Length of period that benefits will be paid
- Length of the waiting period until benefits begin
- Applicant’s age
- Applicant’s state of health
- Types of coverage chosen
Long-Term Disability Insurance (LTD)
If you are retired, you may qualify for Long-Term Care Insurance. However, to qualify for long-term disability (LTD) insurance (also known as income protection insurance) you must be employed and have income to protect. LTD insurance replaces a portion of lost wages due to illnesses or accidents that meet the policy’s definition for benefit eligibility. Since most regular living expenses continue whether you work or not, you may need extra protection to maintain your family’s lifestyle. Unless you have enough paid sick leave and other sources of income, you will want the paycheck protection of LTD insurance. In this case, there is no direct relationship to your ability to perform activities of daily living—only your ability to work.
In many policies, if you suffer a loss of income due to a covered illness or injury and you cannot perform the duties of your “own” occupation, then, usually for some period of time (e.g., two years), the plan pays a monthly benefit. After that period, however, employees would have to prove they are unable to perform “any” work for which they are fitted by education, experience or training. Thus, this type of insurance is directly related to one’s ability to perform occupational activities—not daily activities outside a normal work environment. To qualify for such insurance, you will probably need to be below age 65 and actively at work. You may fail to qualify if you work in occupations deemed too risky by insurers. Without such coverage, you may require governmental assistance (e.g., food stamps, Supplemental Social Security, or state or federal Social Security disability benefits) or have to rely on family or others to pay your expenses.
Critical Illness Insurance
Critical illness insurance provides a lump sum benefit when a critical illness occurs. It is based on the premise that an expensive critical illness, even when covered by good, comprehensive health insurance, can financially disable you or a loved one. Whereas long-term care insurance is designed for the mature audience and long-term disability insurance is designed for the actively working audience, critical illness insurance is designed for younger members and their dependents. It has nothing to do with an inability to perform activities of daily living or the activities of one’s occupation. It is not related to the expenses of long-term care or occupational income. In fact, the benefit has no direct relationship at all to the expenses of the qualifying illness. It pays a scheduled lump sum at the first diagnosis of a variety of expensive health conditions that often occur, such as a heart attack, cancer or stroke. These are the three most likely causes of death, but a growing majority of people who become diagnosed with these life-threatening conditions live many years after the diagnosis, and tend to have high, continuing expenses, not all of which are directly related to patient care.
Some of these expenses might be:
- Lost wages for a family member to accompany the patient to treatment facilities
- Private duty nurses
- Transportation, food and lodging expenses
- Caregiver to stay with the patient
Critical illness insurance simply pays a lump sum at the first diagnosis of the eligible illness, in amounts up to $100,000. It is more analogous to a term life insurance benefit than either long-term care or long-term disability income insurance, since the lump sum benefit is paid once and then the policy terminates. Neither long-term care nor long-term disability insurance terminates once it pays a benefit unless the maximum benefits of either policy are exhausted.
These three types of policies insure our members and their dependents against different financial risks. When evaluating any financial plan, these risks should be taken into account.