The Difference Between Long Term Care and Long Term Disability

Is Long-Term Care more appropriate for retirees than for active employees?  What is the difference between Long-Term Care (LTC) and Long-Term Disability (LTD), and what is the best age to buy? 

The following analysis supports contemporary thinking that employees with more than 15 years of service should begin to scale out of Long-Term Disability (LTD) coverage and into Long-Term Care (LTC) programs.  As illustrated in this column, from Age 43, LTC may provide greater future payouts than LTD, due to increasing LTD offsets e.g. disability retirement.

The Basics

Long-Term Disability (LTD) is basically “paycheck insurance.”

• It insures your paycheck
• It is non-transferrable
• It is discontinued upon your retirement

Long-Term Care (LTC) is basically “retirement insurance” and “family insurance”

• Protects pension income and 457 deferred compensation money, even before retirement
• Guaranteed portable when you retire (guaranteed renewable for life!)
• Prevents broken family relationships over who is to give up their career, in order to provide your care

In many cases, enrolling in Long-term Care Insurance early (mid-forties), may provide a greater benefit payout, compared to Long-term Disability Insurance (LTD), as illustrated in the Table.

Employee Example:

Original Hire Age 25

Retirement Benefit Formula:  Approximates 2.5% at 55
Covered Under Group Long-term Disability (LTD) Plan

LTD formula:

     6000.00   Monthly earnings

     X .660      LTD gross benefit

     4,000.00  LTD benefit

Less deductible offsets e.g. sick leave, SDI, social security, disability retirement

Comments:  Year 1 of long-term disability payments may yield as much as $48,000 (66% benefit), but the LTD insurance carrier will soon require filing for disability retirement, which if approved, becomes a deductible offset.  The future value of LTD disability payments declines rapidly past Age 43, whereas the value of long-term care benefits increases 5% per year, no cap.

This information should not suggest LTD Insurance is not necessary past age 43, rather to emphasize the growing importance of LTC Insurance in the pre-retirement years. Please remember, Long-term Care Insurance is not for everybody.  It is for people who want to be independent of welfare, and want to maintain control, preferably in their home. 

Written By Marc F. Derendinger (edited for blog by Lauri Dilbeck 7/1/14)

Editor’s Note:  Marc Derendinger helped the City of San Jose establish its first-ever group voluntary long-term care plan in 2001.  In addition to serving as an advisor to the State of California DHCS California Partnership for Long-term Care, Marc offers assistance at (408) 252-7300 x27 or by email at www.derendingerinsurance.com/services/longtermcare.html.