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Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Wednesday, May 5, 2010

Do You Have These Three Policies?

When clients come to us, most have automobile, homeowner’s and medical insurance policies. There are three policies, however, that they often don’t have that may be needed to protect them from events that could seriously impact their future finances. Often not considered are long-term disability insurance, umbrella liability insurance and long-term care insurance. While these policies may not be needed, everyone should, at a minimum, make an informed decision as to the suitability of each policy for their particular circumstances.

It is very important to have long-term disability insurance, since you are, on a given day, more likely to become disabled than you are to die. Some people are provided this coverage through their work. Even if you already have coverage, you need to be sure that the coverage is for your “own occupation” and not “any occupation”. It is very difficult to collect benefits with “any occupation” coverage, since one must be unable to perform any occupation in order to be considered disabled.

Adequate “own occupation” coverage should provide benefits equal to 60% to 70% of your salary. Note that you cannot generally acquire coverage higher than 60% to 70% of your salary since a higher coverage would eliminate the incentive for you to return to the work force.

With our litigious society today, you may also want to acquire an umbrella liability policy to protect you from a lawsuit. These policies typically provide additional liability coverage in million dollar increments. You are required to have a minimum amount of underlying liability coverage with your homeowners and auto policies (usually $300,000 to $ 500,000). This type of insurance can typically be bought for $ 250 to $ 300 a year per million dollars of coverage. If you had $ 300,000 liability with your auto policy and a $1 million umbrella policy, you would have a total of $1.3 million liability coverage, in the event of an auto accident. For the cost, this type of insurance makes a great deal of sense for many individuals.

Finally, more and more people are considering long-term care insurance. There are many people now saying that long-term care is the real health care crisis in the United States. Long-term care insurance generally provides for a variety of services for people with a prolonged physical illness, disability or cognitive disorder. It often includes nursing home care, home care services and adult day-care services. To qualify, one must typically be unable to perform two of six activities of daily living (known as ADLs: eating, dressing, toileting, bathing, continence and transferring). This does not apply to those with cognitive disabilities such as Alzheimers. Some companies recognize five activities of daily living and do not include bathing, typically the first activity an elder person cannot perform. One should look for policies that include all six ADLs.

Some consider the odds to be about 50/50 that one will need long-term care. One national study predicted that about 60% of those age 65 or older will enter a nursing home at some time during their life. The chances are greater for women to spend time in a nursing home than men, since women typically live longer. Average stays are generally short, usually less than three years, often much less.

Many falsely assume that Medicare will provide for long-term care needs. Medicare will not meet an individual’s long-term care needs. Medicare provides up to 100 days of skilled nursing care but only following a hospital stay. Medicare also will provide for very limited home health care. Medical supplements to Medicare will not cover long-term care costs, nor will traditional health care insurance. Medicaid will cover long-term care but typically only for individuals with less than $ 2,000 in total assets.

Nursing home care can easily run $75,000 a year or more. The price of a policy depends on the features selected, your age and health condition. Those aged 55 to 60 could expect to pay $2,000 to $3,000 a year, or more. When considering long-term care insurance, there are many issues to consider, such as your family medical history, support structure within the family, available resources, etc. Some may have enough assets in the future to self-insure. However, if you should decide to acquire a long-term care policy, the sooner you purchase it, the better.

The above three insurance policies can provide important protection that is often overlooked. With budgets tighter than ever, we’re sure the added cost can be a hurdle to overcome. Whatever your situation, we hope that making you aware of these exposures will allow you to at least make an informed decision on whether or not to protect yourself.


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