Catastrophic disability insurance rider on your disability insurance policy may be the bridge you need to cover a unique gap in your insurance planning.
by Chris Grande
Most people under the age of 50 are not thinking about long term care insurance. According to the Administration on Aging site LongtermCare.gov, it would seem that older people should do most of the worrying. Because someone over age 65 has almost a 70% chance of needing long term care services in their lifetime.
Whereas people between 40 and 50 have only about an 8% chance of needing it. But is 8% too small a chance to bother with when drafting the insurance part of YOUR financial plan?
Some financial experts recommend waiting until one hits their late 50s before considering long term care insurance. So this insurance “gap” typically goes unfilled.
But 8% is a big number in my opinion. In fact, as an anecdotal example, I have noticed a large enough case of people with early onset dementia “EOD” to make me think twice about dementia being an “old age” disease. (See this paper from the National Institutes of Health which cites increasing occurrences of EOD. EOD is but one of many ways we are affected by long term illness). Therefore, if this risk could be insured at low cost, wouldn’t it makes sense to investigate it?
Enter the Catastrophic Disability Insurance rider. “Cat riders” are supplemental “riders” on disability insurance policies. And this rider can increase your monthly benefit enormously. If you become disabled, and your disability is more like a long term care event than a simple job duty disability, you might trigger the additional benefits of the Cat rider. Lets analyze further to be clear on this.
Disability Insurance Trigger
Example – you have a typical disability policy that covers you specifically for your job skills (an “own occupation” policy). You are employed as an eyeglass maker. You develop a disorder in your hands that no longer allows you to
You are likely now considered disabled for your own occupation. And your regular disability benefit outlined in the policy will likely kick in. After the waiting period.
What if it wasn’t some hand disorder. What if you have a serious incident that triggered the catastrophic benefit? These triggers mirror the triggers for activating long term care benefits in a traditional LTC policy. Either 2 out of 6 Activities of Daily Living (ADLs) can not be performed. Or some kind of cognitive impairment kicks in. ADL’s are things like being able to bathe or feed oneself.
If either the ADL or cognitive trigger occurs, then your catastrophic disability insurance rider would likely activate. If you have one of course. And then policy could pay a heck of a lot more. How much more? We had a recent case where a client needed a small disability policy of $36,000/year benefit. In his early 50s, he is likely to work another 15-20 years.
However, he is starting to get concerned about long term care. But shelling out $6,000/year for long term care insurance for himself and his wife is tough to swallow. Especially at his age.
As an aside, Long Term Care insurance is the insurance mostly likely – in my opinion – to trigger this though in people’s heads. “I am just throwing away money that I ‘won’t get back.’”
The Solution – Add the Catastrophic Disability Insurance Rider
However for ~$30/month more on his disability policy, he can add the catastrophic disability insurance rider (“cat rider”) that will pay him almost an extra 6,000/month until age 65. That’s $9,000 a month and provides a solid bridge. Specifically, if early onset dementia were to kick in, at age 57, he’d get almost $9,000 month until age 65. That’s 8 years. Which is a heck of a lot longer than most long term care policies would pay. An 8 year LTC policy for $9,000/mo would be rather expensive!
Therefore, for people who are younger, want to cover gaps in protection and can see that $30/mo is a tiny investment, this rider fills that void. And if the client waits until later to get long term care insurance, he will have the “gap” between now and then covered.
Of course, putting off buying true long term care coverage has its own risks. The major risk is health. There is no guarantee that later on someone will qualify for long term care. It’s just a fact that many people do not. Interestingly, another anecdotal point from my own experience: people seem to either qualify for preferred ratings or get rejected outright for long term care insurance.
Further Risk Mitigation
So what do you do? You’re in your 40s or 50s. You know you will need this coverage later on. because married couples are highly likely to experience at least one LTC event in their life.
Do you start paying 4-5,000year for both of you to have long term care insurance? Do you just get the cat rider and take your chances you will be healthy later?
Are there other ways to plan? yes we could couple the Cat rider with a hybrid long term care life insurance policy. Chances are you need life insurance because you’re still young and have kids who are not on their own. Enter the hybrid policies and life insurance policies with long term care riders.
Life and Long Term Care Insurance – Complementing the Catastrophic Disability Insurance Rider
I hated these products when they first came out. The reason? It was just pushing the mashed potatoes around the plate. It was still mashed potatoes but looked different. Originally, these policies did not stack up well against simply buying life insurance, buying LTC and investing the lump sum that would’ve been dumped into the hybrid policy. Especially in the time when interest rates were NOT ZERO %.
However in the last few years, better companies have gotten into the game. And what I am seeing is that the current crop of hybrid policies offer a good combination of coverage and a decent return on cash if held over 10 years (in some cases 3-4+% return). Which in the low interest rate climate we suffer in, is something to consider.
The major downside to the hybrid products is lack of a cost effective monthly benefit inflation rider. Which of course makes this difficult to consider when younger. However it does provide some base. And for people with cash, buying a hybrid policy compares very well to leaving the money in the bank.
With that said, a true long term care insurance policy would be the best way to guard against inflation.
Conclusion – However You Go on LTC – the Catastrophic Rider is a Solid Addition to the Plan
But the consumer still has to make a choice – a trade off – between cost and coverage on long term care insurance options. And that decision is a choice involving math and level of aversion toward paying premiums.
In my opinion, there is little downside to adding the Catastrophic Disability Rider to your plan. In the above example, the client is paying $360/year. The same cost as a condo policy. And the benefit is truly powerful. I have one of these riders myself and highly recommend them for “DI” buyers.
And the best way to get this is to own a personal disability insurance policy (which has many other advantages over a workplace plan) and add the Cat rider.
Questions? Contact us
If you have questions about properly planning for disability protection in your overall financial plan, contact us. Here’s 3 choices to contact us:
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We look forward to hearing from you! And as we always recommend, talk to a professional, anyone doesn’t have to be us, before making moves with your financial planning. Don’t go canceling or applying for coverages without a proper consult and analysis ok?
Featured image courtesy of Upupa4me on Flickr.