Disability vs. Long-Term Care Insurance: Who Needs What and When?

Guest Post by Jack Wolstenholm

Health insurance plans often have gaps. Holes in coverage that lead to huge bills, or worse — the inability to get the treatment you need at all.

To plug these holes and fortify your financial safety net, you can purchase additional types of insurance. Two such types are disability and long-term care insurance.

In this article, we’ll break down the ins and outs of both, including what they cover, how benefits work, how much they cost, and the best time to buy.

What they cover

Disability insurance covers you against the risk of losing your income — specifically, the loss of your ability to earn a paycheck in your occupation due to injury or illness. Leading causes of disability insurance claims include musculoskeletal disorders, diabetes, heart attack, stroke, back pain, broken bones, and complications from pregnancy. In order to qualify for disability insurance benefits, you must prove your condition meets your policy’s definition of disability. 

• To meet an own-occupation definition of disability, your condition must either prevent or limit your ability to perform some or all the duties in your job occupation. However, you still may be able to work in another occupation and receive benefits simultaneously.
• To meet an any-occupation definition of disability, your condition must prevent you from working in your current occupation or any other occupation. Essentially, you must prove the inability to work, period.

Long-term care insurance covers you against the risk of having to pay for the cost of a nursing home, assisted living facility, or home health aide if you become unable to care for yourself. The policy helps pay for the necessary care facilities often required by people with:

• Dementia, Alzheimer’s disease, and other cognitive disorders
• Parkinson’s disease and other neurological disorders
• Chronic conditions that limit mobility and the ability to live independently

In order to qualify for benefits, you must prove the inability to perform several daily living (ADL) activities: bathing, dressing, eating, walking, and using the bathroom. Without coverage, the cost of long-term care can quickly become financially overwhelming.

Key Takeaway: Both disability and long-term care insurance offer protection against health-related financial risks — lost income and long-term care expenses — not covered by private health insurance.

How benefits work

Disability insurance pays a monthly benefit if you experience a disabling event that prevents you from working. How much your policy pays out depends on the benefit amount you select, which is determined by how much income you earn. When benefits begin paying out after becoming disabled depends on the length of your waiting period, and how long benefits will last depends on whether you have long-term or short-term disability insurance. Typically, a disability insurance policy will replace somewhere from 40 percent to 80 percent of your monthly pre-tax income. This is your money to use however you like: pay bills, cover everyday expenses, whatever you need to provide for yourself and your loved ones.

A long-term care insurance policy will pay benefits in one of two ways. If it is an expense-incurred policy, you will be reimbursed for the long-term care expenses you are charged, up to a maximum benefit amount. You must submit claims based on what you have spent to receive your benefits. On the other hand, an indemnity policy will pay out a set dollar amount regardless of the cost of the service you receive. You will begin receiving benefit payments once you receive long-term care and after your policy’s waiting period ends.

Key Takeaway: Disability insurance replaces lost income for you to use freely, whereas long-term care insurance benefits must be put toward qualifying long-term care expenses.

How much they cost

The cost of disability insurance is determined by a range of personal factors and policy choices.  Your age, gender*, location, health history, lifestyle choices, and job occupation all may influence your monthly premium rates for better or worse. Policy choices, such as the benefit amount, benefit period, elimination period, and any additional riders you select, will also impact what you pay for coverage. Ultimately, you can expect to spend somewhere between one to four percent of your annual income on disability insurance coverage.

Just like disability insurance, the cost of long-term care insurance depends largely on details from your personal background and the policy choices you make. Cost also increases as you age due to the increased likelihood of filing a claim — the older you get, the more likely you become to experience a qualifying health event that requires long-term care. The main difference between how these two types of coverage are priced is that long-term care insurance is not impacted by your job occupation.

Key Takeaway: Both disability and long-term care insurance become more expensive the older you get, but that doesn’t mean both should be purchased when you’re young. (More on that below.)

*Traditionally, women pay more than men with all other factors equal because historical data shows they are more likely to file claims. However, Massachusetts passed legislation to prevent insurance companies from using gender as a determining factor in the cost of coverage. New York has followed suit by introducing legislation as well. 

The best time to buy

It’s best to buy disability insurance early on in your working years. There are two reasons for this:

The scope of disabling injuries and illnesses is wide and one can strike anyone at any time. In fact, the Social Security Administration estimates that one in four of 20-year-olds will experience a disabling event before reaching normal retirement age.

As discussed above, the cost of disability insurance increases with age. It’s never going to be cheaper than it is today.

It’s best to buy long-term care insurance later in life, ideally as you approach retirement. People who purchase coverage in their fifties may find it to be advantageous since they are in their peak earning years. And if you’re already on track with your retirement savings and other major expenses, such as raising children or paying down debt, are in the rearview, the cost will be easier to manage. Plus, it will help secure the retirement savings you’ve worked so long and hard to build.

The numbers back this up, too:

• About half of 65-year-olds today will eventually require long-term care, according to the U.S. Department of Health & Human Services.
• Less than five percent of long-term care claims started in 2018 were for people under the age of 70, whereas over two-thirds of claims began were for policyholders age 81 years or older.

Key Takeaway: Disability insurance is perfect for the young, healthy, and employed; long-term care insurance, for the wise who are winding down and entering their sunset years.

Jack Wolstenholm is the head of content at Breeze, a digital-first insurance company that helps protect people against life’s most financially vulnerable moments.