It's hard to know exactly how much income you'll need after you suffer a disability, but you'll probably need more than you think.
How Much Disability Income Insurance Should You Have?
The amount of individual disability income insurance you should buy depends on three
things: how much income you'll need if you become disabled, how much money you can
afford to spend on premiums, and how much insurance you'll be able to purchase under
the insurance company's guidelines.
Determine how much income you'll need if you become disabled
It's hard to know exactly how much income you'll need after you suffer a disability,
but you'll probably need more than you think. Most of your fixed expenses won't
change, and you may save money on work-related expenses such as clothing, automobile
costs, and lunches out. However, you'll also spend more on other items, including
Medical expenses: You can expect your medical expenses to rise when you suffer a
disability. Assuming that you have health insurance, you'll probably have to satisfy
a deductible as well as an out-of-pocket maximum, which may increase your expenses
immediately after your disability occurs. In addition, if you suffer a long-term
disability and are forced to quit your job, your group medical insurance coverage
may be terminated. If you work for a large enough employer, you may be able to continue
coverage on your employer's plan through the government regulation known as COBRA,
but you'll have to pay the premium yourself, and the coverage cannot last beyond
18 months in most cases. This can add hundreds of dollars to your budget. You may
also need to buy medical equipment or supplies, or even renovate your house to accommodate
Living expenses: What if you can't drive, clean your apartment or house, mow the
lawn, or cook for yourself after you become disabled? Will you need to hire household
help to take care of day-to-day activities that you can no longer do? Hiring help
can be a substantial, unexpected expense when you become disabled.
Child-care expenses: If you have young children and both you and your spouse work,
you know how expensive child care is. Can you afford it if you or your spouse becomes
disabled and unemployed? The disabled partner may be able to care for the children
at home, but not if his or her disability is too limiting. On the other hand, if
you currently stay at home with your children, you may be forced to return to work
if your spouse is disabled, and you may have to contend with an unforeseen additional
Find out what disability benefits you're already entitled to
You may already be covered by some disability income insurance through your employer.
This may be short-term coverage, long-term coverage, or both. Short-term coverage
pays a weekly benefit, usually after the first day of an accident or the eighth
day of an illness, for a period of 13 or 26 weeks. Long-term coverage pays a monthly
benefit that begins after the short-term period expires. The benefits are usually
paid until age 65. If you have one type only, you should look into buying a private
policy for the type of coverage that your employer does not provide. If you have
both short-term and long-term coverage, you are probably ineligible to buy any additional
coverage, unless your employer's plan limits the maximum benefit to an amount that
is less than 60 percent of your annual income.
You could depend on getting disability benefits from Social Security, if you pay
into the system. However, relying on this type of insurance can be dangerous. Social
Security pays benefits only under strict definitions of disability, making it very
difficult to qualify. Also, benefits are limited and may not be adequate for your
needs. Review the coverage available to you, take a look at the specifics of any
group disability policies you already are covered by, then decide whether you need
more disability coverage.
How Much Disability Insurance Can You Buy?
If policy premiums are paid with after-tax dollars, the benefits will
be received tax free. Premiums paid with pretax dollars, usually through your employer,
may cause the benefits to be taxable when received.
If you need more disability income insurance, how much should you buy?
Once you've decided that you need to buy more disability income insurance, you should
aim to cover a significant portion of the income that you will lose if you become
disabled. However, you may not be able to buy as much coverage as you want. The
insurance company determines the maximum amount of disability income insurance you
can purchase, based on your income, health, age, and the amount of other disability
benefits you're entitled to. Most companies will sell you insurance that replaces
50 to 70 percent of your monthly pretax earnings (of course, you can opt to buy
less than this amount).