Why you might need both on the road to recovery
Many people often confuse disability insurance and long-term care insurance. In fact, these are not the same thing, and you should not assume that if you have a disability plan through your employer, you are also covered for long-term care.
Disability insurance to replace lost income
Disability insurance is essentially designed to replace most of your income if you become disabled through accident or illness. It allows you to continue to pay living expenses during your recovery, and to avoid the possibility of real financial hardship if you’re forced to deplete your own savings, redeem investments, or even sell your home to cover expenses.
There is a wide variety of disability insurance available, ranging from individual and employer-sponsored group plans to various government plans. But not all are equal. Some policies pay benefits that are tax-free, others are taxable. Some provide only temporary coverage, and some coverage stops the minute you change employers. The permutations and combinations are seemingly endless.
Various government plans offer some form of short- or long-term disability coverage, including provincial Workers’ Compensation boards, federal Employment Insurance, and Canada and Quebec Pension Plans. But in these cases, coverage is scanty and the qualifications for “disability” are very limiting.
If your employer is providing disability coverage, ask about the following benefits:
- Sick leave. Very short-term absence ranging from a few days to a few weeks.
- Short-term disability. This typically kicks in for periods of three months to a year.
- Long-term disability. This takes effect after your short-term disability or Employment Insurance benefits end, and may last as long as two years. It usually replaces 60% to 70% of your regular income, with some maximum monthly dollar limit imposed.
If you’re self-employed, three basic types of individual disability plans are available: “Noncancellable guaranteed renewable” plans can’t be cancelled and premiums can’t be increased during the policy period; “Guaranteed renewable” plans can raise premiums for an entire specified group only; “Commercial” plans may be cancellable on the anniversary of the contract.
Other features of individual plans to consider are a waiver of premium payments while you’re disabled, the ability to increase coverage without a medical exam or questionnaire, and benefits based on loss of income instead of just the loss of your ability to work. There are also a variety of options for length of coverage, ranging from specified periods to lifetime coverage. In addition, if you’re self-employed, premiums for disability insurance may be tax-deductible as a business expense.
Long-term care insurance for financial stability
Long-term care insurance isn’t designed to replace your income if you become disabled. Rather, it gives you a measure of financial stability if you are unable to care for yourself as a result of disability from a chronic illness, dementia or other cognitive impairment (stroke), or other age-related ailments. Benefits typically can provide coverage for nursing homes, long-term chronic care facilities, or in-home nursing care – basically all the long-term care expenses that government plans don’t cover, or upgrades if you want them. And a major additional benefit is the peace of mind this give you, knowing your family won’t have to bear the entire burden of your care should you need it.
There are two types of long-term care policies available: An “income” plan pays a set monthly amount that you can spend any way you want; an “expenses” plan pays for eligible costs, such as private nursing, up to some maximum predetermined amount. Various “riders,” or optional benefits, may also be available, including, for example, the ability to pool coverage between you and your spouse, waiver of premium once you start collecting your benefits, inflation protection, and medical and social support services. All these would, of course, increase your premium.
A number of factors will impact the premium you pay, including your age, health, benefits and features of the policy, and the waiting period you choose. The younger you are when you apply for this type of insurance, the lower your premium, other things being equal.
It’s complicated, so get help
As you can see, disability and long-term care insurance can get complicated. And most of us would rather not even think about it. But like any other piece of pre-planning, like a lifeboat, it can get you out of a dangerous situation when you need it the most. You can’t buy disability insurance directly. So a qualified insurance agent is a good place to start your shopping.
© 2015 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.