Why disability insurance and long term care insurance are important

I’ve heard many excuses as to why people refuse to purchase either disability or long-term care insurance. But I have to say that for all the excuses I’ve heard, there are reasons why these types of protection are important and why they need to be a part of a person’s life.

The main excuse people offer is that the insurance is too expensive; they just don’t want to pay money out of their pocket every month for something they might not need. Expense is definitely a concern for most people, but let’s consider the consequences of someone who fails to purchase any disability insurance. Let’s assume that my client, Bob, wants to accumulate money for his retirement. Right now he is 48 years old and, so far, has done a very good job of building up a retirement fund. He has approximately $100,000 in his 401 (k) at work and about $200,000 in nonqualified accounts. One day, Bob is outside painting his house, falls off the ladder and breaks both his legs. Bob works as a truck driver and needs to be able to drive a car in order to work. Therefore, Bob is unable to work and must take time off.

He sees the human resources department of his company and arranges to take his five remaining sick days, but since the accident happened at home and he has no form of disability insurance at all, that is all the income he will receive. Bob’s doctors have told him that he will not be able to work for at least six months. Bob’s current salary is $85,000 per year. His wife also works and her salary is $37,000 per year. Because Bob will be missing six months from work, he will lose out on $42,500. His one week’s worth of pay from his sick days will give him a gross paycheck of $1634.62. Where is Bob going to come up with money to help pay for his regular cost of living, not to mention his medical bills?

(All amounts are in before tax dollars.)

For starters, Bob’s health insurance will pay for some, and perhaps most, of his medical bills. Plus, his wife works and her income will not be affected by Bob’s accident. But he is the main breadwinner in the family, and his income has been effectively shut down for at least 6 months. This means that Bob is going to have to use some of his nonqualified savings to help pay for his lifestyle. Even if Bob’s and his wife’s lifestyle isn’t that expensive, it’s safe to assume that they will deplete a good portion of their savings because they have no form of DI. Bob will not be able to qualify for social security disability benefits because although he will be off work for more than 5 months, he doesn’t meet the rule that says he needs to be disabled for at least 12 months. Plus, he has to be unable to work at any job, and, chances are, Bob would be able to find employment somewhere even though his legs are broken.

So, if Bob and his wife take out $50,000 from their nonqualified account to help cover bills and other expenses, they will then be left with $150,000 left in that account. That’s still good, but what if they need more money? It will have to come out of the same account, thus continuing to deplete the account. Plus, they will probably have to pay some form of capital gains tax on whatever they pull out, if they haven’t done so already. Then, not only will they miss out on the growth of that $50,000 (or more), but they will also want to repay themselves, which may put a strain on their income after Bob returns to work.

Had Bob had some form of DI, he would have been able to retain some of his income while he wasn’t able to work. He and his wife wouldn’t have had to use their savings, the $50,000 would have grown with the rest of the savings, and most likely, Bob’s benefits would have been tax-free.

In the case of long-term care, the results of no insurance can be even more devastating. Right now the average cost of a one-year stay in a nursing home is $45,000. In some parts of the country, like New York or California, it costs more. Not having any long-term care insurance can exhaust whatever money you have saved up.

The other excuse that I hear is that these are types of insurance that people never use. Remember that a 55-year-old worker has a 70percent chance of becoming disabled for three months and that the odds of needing more than one year of long-term care for a 65-yearold are 1 in 33. Yes, there is a chance that if you purchase DI or LTC you will not use it. However, there is also a chance that you will need it. Which chance are you willing to accept? Don’t let the assumption that you will never need disability or long-term care insurance keep you from purchasing it. I haven’t met anyone yet who can predict the future, so how can you be sure that you won’t need it?

In the case of Bob and no DI, he still has time to go back to work, earn money and save for his retirement. But for many people needing long-term care, there isn’t that kind of time. Most of these people have already retired and aren’t earning any kind of income, except what may come in from their investments. And, most people aren’t earning in excess of $45,000 per year purely off of investment income.

That’s why disability and long-term care insurance are so important. They protect you from the “what if ” scenarios. Plus, they protect the assets you have already accumulated so that you don’t have to use them in an emergency. And really, that’s what insurance is all about: protection. When you listed your goals, did you list “have enough money?” Ask yourself, if you became disabled or were in need of some sort of long-term care, would you have enough money?

I don’t mean to scare you, but I do want you to think. Not protecting yourself and your assets flies directly in the face of trying to accumulate wealth. You may say that by paying money for insurance, you are missing out on investing that money and its growth. That’s definitely true. But if you were to need that insurance and you didn’t have it, would the growth you enjoyed from that money be enough to cover you for the entire time you were either disabled or in need of long-term care? Accumulating wealth is an admirable goal, but don’t sacrifice protection just to help meet that goal. In the long run, you’ll thank yourself.