The Loop

LTD vs. LTC Insurance

Filed under: Benefits

The purpose of insurance is to cover an unexpected expense that you would not likely be able to pay for out-of-pocket – at least not without harming your long-term financial security. Many insurance policies are for singular occurrences, such as an auto accident, a fire in your home or a serious medical event.

However, long term disability (LTD) and long term care (LTC) insurance policies are different because they offer coverage over a long term, quite possibly the rest of your life. Furthermore, these types of policies may cover expenses ranging from your monthly household mortgage and utilities to having a full-time caregiver. On one hand, you might need this coverage for a few months while recovering from a motorcycle accident; on the other, you may need ongoing assistance with bathing and dressing for the rest of your life.

Insurance Options
While LTD and LTC may seem similar, they are purchased for two very different situations. LTD is about replacing income while you are unable to work.

LTC, on the other hand, is generally purchased to provide coverage during retirement years. While Social Security and a pension may be able to provide for day-to-day outlays, the possible need for long-term caregiving is one of those expenses best covered by insurance. Purchasing LTC insurance can help avoid gutting the household nest egg while one or both spouses is still alive.

The following details how these two different types of insurance policies work.

Disability Insurance
Disability insurance replaces a portion of lost income due to an inability to perform your job. The worker must meet qualifying criteria to receive benefits. For example, the disability may prevent him from being able to perform his job in particular, or any job in general.

It is common for employers to offer disability insurance to workers. However, plans can vary significantly and some may not offer sufficient coverage should you get laid up. Therefore workers may want to consider purchasing additional disability coverage through an individual policy. Note that payouts from an employer-paid disability insurance policy are taxable, while those from an individual policy are not. Also be aware that the premiums for an individual policy may be substantially more expensive than under a voluntary or employee-paid policy sponsored by an employer. If the employer offers the option to purchase an additional amount of disability coverage, the group rate will likely be cheaper than that of an individual policy.

Employers typically offer both short-term and long-term disability insurance. In California, the State Disability Insurance (SDI) program mandates wage replacement benefits in the form of Disability Insurance (DI) or Paid Family Leave (PFL), which are funded through payroll deductions.

The CA short-term disability insurance program pays part of a worker's wages if she unable to work due to a non-work-related illness or injury, pregnancy or to care for a new child or other qualifying family member/partner. Payments begin within 14 days of receiving a completed claim form and the worker's medical documentation. Benefits replace approximately 60 to 70 percent of a worker's income (from $50 to $1,252 per week).

To receive subsequent benefits, the worker is required to complete and return an additional form, after which he will be paid 1/7 of his weekly benefit amount for each eligible calendar day. Benefits may be reduced if the worker receives income from any number of other sources, such as sick leave pay, paid time off, military pay, or workers' compensation benefits.

California's short-term disability program benefits will continue until: the estimated date of recovery specified by the beneficiary's physician; the worker is recovered or returns to work; the worker receives the maximum benefit amount for which he is eligible.

Long-term disability insurance is generally considered to be a key policy for many workers, particularly those with a family that relies solely on that one income. ¬¬One of the reasons disability insurance is important is due to advances in medical care. In other words, medical technology and pharmaceuticals have made it possible for people to live with diseases and injuries that used to be fatal. However, while a person may live with the disease, he may be too disabled to work and earn a living. Typically, long-term coverage:

  • Initial coverage is based upon total wages at the time of purchase, so workers want to report increases in those wages as they occur.
  • Some plans may require a physical exam in order to increase the coverage amount
  • Long-term disability policies vary in the length of payout: some may pay out for a certain term, such as 5 or 10 years, while others may pay out until age 65
  • Policies may vary in their definition of disability, particularly with regard to mental illness or back injuries
  • Some policies exclude pre-existing medical conditions or injuries from dangerous activities

Long Term Care Insurance
Coverage under a long term care insurance policy often kicks in when the beneficiary is unable to perform at least two functions of daily living, which include bathing and grooming, using the toilet, dressing, preparing food/feeding oneself, walking or moving from one position to another.

Typically, long term care insurance:

  • Pays out either a regular fixed sum or as reimbursement for payments made to a long term care facility or home aide service
  • Includes contractual limits to the amount and number of years of coverage
  • Includes a waiting period before coverage begins (typically 90 days)
  • Pays for home care, assisted living and nursing home care services
  • Offers customizable options and riders for an additional fee, such as inflation protection
  • Pays for home modifications and devices to help the beneficiary be able to live at home longer

Some employers pay for LTC Insurance coverage for workers, but most others offer it as a voluntary benefit. LTC insurance also can be purchased on the individual market.

While a person may not need LTC coverage until the latter stages of his life, it's important to purchase the policy at an earlier age – usually before 60. That's because premiums tend to start lower at an earlier age, and because a diagnosed pre-existing condition may disqualify a person from coverage altogether. Also note that premiums for long term care insurance increase over time, and women typically pay a higher premium because they live longer than men and statistically make more claims.

By contrast, premiums for long term disability insurance are usually fixed for the length of the benefit period. Some policies even offer a guaranteed renewable option so the policy cannot be canceled.

Both types of insurance policies – disability Insurance and long term care – are an important part of financial planning. The biggest difference is the age of the policy owner. LTD replaces income while the beneficiary is still working; LTC doesn't provide coverage until the beneficiary is severely disabled, generally during retirement.

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