The transition from disability income to long-term care insurance
There’s no doubt that the amount of insurance we need throughout our lives changes as circumstances change and wealth increases. I know this firsthand as a father who just added a teenage driver to my auto policy! At some point, the types of insurance we require also changes. A good example is when we transition from our working years into retirement.
In our working years, we are more likely to suffer from an illness or injury than to die prematurely, which is why the premiums on disability income insurance tend to be higher than those on a term life insurance policy. But what about when we retire?
When Earned Income Goes Away
You wouldn’t continue to pay auto insurance on a car you sold, so why would you pay disability income insurance premiums after you retire? In short, you wouldn’t. When we retire, we can assume that our earned income from work has gone away and that we’re living on other income sources such as pensions, savings and investments.
Let’s take it a step further. What if I am financially independent but continue to work out of choice rather than necessity? Again, I would argue that the need for disability income insurance has gone away. While you might qualify for coverage based on your age and income, you’d be wasting money on premiums if you’re already financially independent.
Protecting Against the Costs of Disability Post-Retirement
As you transition into retirement, your insurance needs will likely begin to shift from protecting earned income towards protecting against the cost of an illness or injury that wouldn’t otherwise be covered by health insurance or Medicare. These are commonly referred to as long-term care expenses, and they can present a real risk to retired Americans.
Long-term care insurance is a tool that can help. This type of policy can provide a solid source of funds to help if these expenses ever arise. There are traditional policies with a pay-as-you-go approach and also single-premium “hybrid” policies, which may be linked to your life insurance benefits.
Long-term care insurance, like disability income and life insurance, requires medical underwriting, so the younger and healthier you are when you apply, the easier it is to qualify and the less it’s likely to cost. In other words, it’s something to start thinking about when you’re still in your 60s.
If you retire from an employer, your group disability and life insurance usually goes away. If you are 65 or younger and financially independent, you may also want to consider surrendering any individual disability income insurance policy that you own. The idea is to proactively review the coverage you have versus what you need. The insurance carrier will continue to collect premiums unless notified that you no longer need the coverage.
With long-term care insurance, some policy holders have faced steep premium increases. If this happens to you, don’t automatically get rid of a policy that you’ve paid into for years. A better approach is to evaluate what you have and see if you can modify the coverage in a way that mitigates the premium increase while maintaining important benefits.
Insurance needs change throughout life, especially as we transition into retirement. An unbiased review of your coverage is vital to make sure your risks are covered and you’re not paying for something you don’t need. Ask your advisor to help evaluate your situation and make the right decisions.
For more, read Part 1: What Insurance Do I Need In Retirement?
ABOUT THE AUTHORS
James Ciprich, CFP®, MBA
Jim joined RegentAtlantic in 2007 and has served as chair of the Financial Planning Committee. Serving a broad range of clients, he has a particular focus on retirees considering care and housing options. Jim founded and co-chairs RegentAtlantic’s “Senior Solutions” practice specialty. He is often asked to speak at retirement communities, client events, and is frequently quoted in the media. Jim also serves on an advisory council to the MIT AgeLab. He holds the CERTIFIED FINANCIAL PLANNER™ designation and he has an MBA and a BA in Economics from Rutgers University. He served as an Adjunct Professor at Fairleigh Dickinson University in the CFP® program. Jim is a past president of his local estate planning council, and he has also served as a trustee for Morristown United Methodist Church. In recent summers, he has volunteered with Appalachia Service Project. In a prior career, Jim worked in the music industry where he was awarded multiple RIAA certified gold and platinum albums.
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Different types of investments involve degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable, suitable, or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees which would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.
Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.