How Much Disability Insurance Do I Need?

Published on January 29, 2019 by Kamran Rosen in Life Settlements, Retirement Planning

feature how much disability insurance do I need

How much disability insurance do I need is an important question and part of any working adult’s financial plan. The Council for Disability Awareness reports that more than 25 percent of today’s 20-year-olds will be disabled for at least one year before retirement.

5.6 percent of Americans experience a short-term disability every year. With such a high likelihood of some form of disability, you shouldn’t rely on life insurance alone. For insurance while you are still here and alive, disability insurance is crucial.

We are going to dive in and look at an important question in disability insurance: how much disability insurance do I need? We will look at why you may need this type of insurance, how it works, and other important aspects of disability coverage every American needs to know.

Why Someone May Need Disability Insurance

Disabilities happen often, even to healthy people. Injuries both at work and away from the workplace may sideline you for a period of time. Disease, mental health issues, digestive disorders, joint problems, and even pregnancy are common reasons for disability insurance claims.

With disability insurance, your insurance replaces a portion of your income in the event you are disabled and unable to go to work. Short-term disability coverage typically lasts for three to six months. Long-term coverage generally starts at six months and lasts for up to two years.

Short-term disability insurance usually covers up to 80 percent of your income and long-term coverage replaces around 70 percent of your income from your regular job. But because that is expensive for insurance companies and people are living longer than ever, those policies have become quite expensive.

In either case, you should seriously consider both long-term and short-term disability insurance if you don’t get it from your employer, and possibly on your own even if your employer provides disability insurance.

Keep in mind that employer disability insurance is a great deal, and often subsidized by the company. However, that insurance goes away if you ever change jobs. When self-employed, you don’t get disability insurance unless your state offers some sort of program and you qualify.

In most cases, self-employed workers and anyone who may change jobs in the future (that’s just about everyone) should consider disability insurance.

Family bonding and wondering how much disability insurance do I need.

Items to Consider When Buying Disability Insurance

Most people who buy life insurance do so to secure the financial future of their family in the event of a worst case scenario. But if you are injured or become seriously ill, could your family survive without your income? If they could, would you be able to maintain the same home and standard of living?

If not, you need disability insurance. You can usually choose a sliding scale or a fixed rate of income replacement. Keep in mind that medical expenses and care expenses may be significant when disabled, but you can cut other parts of your budget to make everything work.

Most people are best off finding a disability insurance policy that replaces at least 70 percent of their income for as long as possible. More coverage is better, but also comes with a higher cost. You have to balance cost and coverage to get the best result for your family’s needs.

70 percent of replacement income is usually enough to cover living expenses, which is why that is enough disability insurance for most applicants.

What is Disability Insurance used for?

Funds from disability insurance are not tied to one specific use. Unlike health insurance, for example, where you can only use proceeds for medical costs, disability insurance gives you complete freedom to spend disability benefits on housing costs, medical costs, or anything else.

There is typically a period at the start of the policy where you have to wait after becoming disabled to receive benefits called an elimination period. This should be around 90 to 180 days for most people. Once you pass your elimination period, the insurance plans start paying you a monthly benefit.

It is important to choose a trustworthy, stable insurance company for your disability policy to ensure you get paid as agreed. Most insurance companies are rated for financial stability, customer service, and other features. When choosing from several disability policies, pick the one from the best company at the best price.

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What about Social Security Disability Insurance?

While you should certainly look to buy disability insurance, you have another backup plan in case you are already disabled or need to supplement your disability insurance with a little additional income. That additional income comes from Social Security Disability Insurance (SSDI) for qualifying Americans.

Even with long-term disability insurance in place, you can collect even more insurance benefits from those Social Security (or FICA) taxes you pay from every paycheck. Those payroll deductions fund both the Social Security retirement plan and disability insurance benefits.

Eligibility for SSDI is based on your age, how many years you’ve worked, and the age at which you became disabled. You must also have a medical condition that meets the Social Security Administration’s requirements for disability.

You have been paying your tax dollars to fund Social Security Disability Insurance since you started working, so you might as well get some of the benefits if you do become disabled. This disability income may be an important lifeline to pay for your mortgage or rent, utilities, and groceries in the event you can’t go to work.

Applying and Paying for Disability Insurance

Life happens, so it is best to get your individual disability insurance long before you need it. Applying for insurance is easy, and paying the monthly insurance premiums will protect you and your loved ones from a potential disability.

In most cases, you can fill out one application online which is submitted to several insurers on your behalf. This helps you get the best rate. Adding long-term care to your monthly expenses is not always easy, so getting the best possible policy that matches your budget is key.

Bigger benefits result in a higher premium, so also consider other monthly expenses you pay for today in addition to new insurance premiums for disability.

Once signed up, you can usually pay your premium with credit cards or a bank account. If you do become disabled, you can stop paying premiums and start collecting, where you can use proceeds to help pay off credit cards, medical bills, auto insurance, and other parts of your own cost of living.

Happy couple dancing and pleased with how much disability insurance they have.

Put Together a Disability Plan for your Long-Term Needs

Just like retirement, you should put together a disability plan in case you ever need it. You get homeowner’s insurance just in case your home burns down. You should also get disability insurance to protect yourself in case your body breaks down.

With a group plan, your coverage is usually based on a multiple of your base salary. With individual disability insurance, you pay for a fixed benefit in the event of a disability. Even if you have workers’ compensation and Social Security as a backup plan, you should always protect yourself with disability insurance, just in case.

When you add it all together, you may not need much money to live each month. But if you support a family or live in a high cost of living area, you could need all of those benefits combined to get by. Until you make a plan and look at your finances and options, you don’t really know what you would do in the event of a serious disability.

Choosing the Right Amount of Disability Coverage

In summary, you should choose an amount of disability coverage that allows your family to cover the bills in the event your income from work were to suddenly stop due to injury, illness, or another disability.

Even with a group plan at work and Social Security, you may need additional individual disability insurance to help you cover the bills. Most people should target at least 70 percent of their current salary for a long-term disability insurance benefit. But don’t neglect short-term disability. Unless you have enough emergency savings to last for up to six months, you’ll need short-term and long-term disability insurance.

Whether you live paycheck to paycheck or hold months of savings in a bank account, it may not be enough to cover your costs if disabled. Family circumstances could make disability insurance even more important. Do the math and make sure your insurance coverage is enough. If it isn’t adding disability insurance is the right choice. Make sure you get enough coverage to meet your family’s long-term needs.

Kamran Rosen
Kamran Rosen is a freelance personal finance writer and expert. He graduated with B.S. in economics from University of Vermont. He was previously a staff writer for both Nerd Wallet and The Hustle.

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