Disability Income and Long-Term Care Insurance
Disability income fundamentals
Two key definitions: own occupation (most favorable to the insured, pays if you cannot do your specific job) and any occupation (pays only if you cannot do any job for which you are reasonably suited). A common compromise is own occupation for two years, then any occupation.
Other levers: elimination period (waiting period before benefits start), benefit period (2 years, 5 years, to age 65, lifetime), residual or partial disability benefits, presumptive disability, recurrent disability, and waiver of premium. Noncancelable means the insurer cannot raise premiums or cancel; guaranteed renewable means renewal is guaranteed but rates can be increased by class.
Benefit amounts are capped as a percentage of income, typically 60–70%, because the purpose is income replacement, not profit.
Long-term care
Benefit triggers: unable to perform 2 of 6 ADLs (bathing, dressing, toileting, transferring, eating, continence) for at least 90 days, or severe cognitive impairment. Benefits may be reimbursement (actual charges) or indemnity (flat cash). Coverage settings include nursing facility, home care, and adult day care. Features: elimination period counted in days of service, inflation protection, and tax-qualified status.
Taxation
Individually paid disability premiums are not deductible; benefits from individually paid premiums are tax-free, while benefits from employer-paid premiums are taxable. LTC premiums may be deducted as medical expense within age-based limits; LTC benefits are generally tax-free up to a per diem cap.
Rule of thumb
A cheaper policy always means one of four things: longer elimination period, shorter benefit period, stricter definition, or weaker residual benefit. Read the definition first.