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How Much Disability Insurance Do I Need?
Article 3 of 6 in How to Buy Disability Insurance
There are a lot of things to consider when deciding how much disability insurance you should purchase. You will need to take into account anything that influences your financial stability, and how much you are willing to spend on insurance. How much disability insurance you purchase requires a thorough look at your budget and expenses, so take the time to find the right policy for your needs.
TIP: Insurance companies will limit how much disability insurance you can have in an effort to discourage long term reliance on insurance payments. Find the limit on a potential policy, and then work from there to get disability insurance that best suits your needs.
Limits on How Much Disability Insurance You can Buy
Disability insurance income is designed to replace most, but not all, of your income that you make while working. . Disability insurance income companies are aware of the danger that too much disability coverage may create an incentive for a person to stay on disability even when it is medically possible for him or her to return to work.
A typical disability income insurance benefit is 60% of pre-disability income. For example, if you are earning $100,000 per year, your disability income benefit would be $60,000 per year, or $5,000 per month.
TIP: Since you pay the entire premium with after-tax dollars, no part of the benefit is taxable. In other words, the benefit is tax free.
Disability insurance companies further stipulate that in no event will your income from all sources (that is, Social Security Disability Insurance benefits, workers' compensation disability benefits and group insurance disability benefits, etc) exceed 80% of pre-disability monthly income. If the total of other benefits exceeds20% of your pre-disability monthly income, then the benefit from your disability insurance income policy will be reduced so that the total from all sources is 80%.
What to Consider When Determining How much Disability Insurance to Purchase
How much disability insurance you need depends on your finances, savings, and how comfortable you are with taking risks to save money on insurance. Consider the following questions:
- How easy is it to qualify for disability? When you consider how much disability insurance to purchase, look at the definition of disability in a policy. Disability income policies have two types of definitions for disability-- own occupation or gainfully employed. Own occupation definition declares a policy holder disabled if their injury or illness has left them unable to keep working at the same job. However, the second definition states a person is disabled if they are unable to be gainfully employed or work any job.
- Do you want short or long term coverage? How long your benefit period will be or how long you will receive your disability insurance income depends on how comfortable you are with the risk of a long term disability. If there are things in your life that make you particularly vulnerable to long term disability (lots of debt, high mortgage payments, young family), or more likely to suffer a long term disability (family history of illness, long injury history), then you may be less comfortable with saving money by buying short term disability insurance. If you don't have significant financial obligations or a history of illness and injury, then you might not need a long term disability plan.
- How much money do you need per month? The amount of your monthly benefits affects the cost of disability insurance. The insurance company generally determines the monthly benefit of an individual disability income policy based on stable, earned income at the time of purchase. Calculate your monthly financial needs, and get a policy that protects you.
- What is your elimination period? The disability insurance elimination period is the time between your injury and the start of benefits. This period can range from 30 to 180 (NOTE: you say 30-90 in all other articles) days or more. Depending on your resources, you can reduce your premiums by electing to wait 60 days, 90 days, or even 180 days before you begin receiving benefit payments. The longer the waiting period, the lower the premium on your disability insurance income policy.
Determining how much disability insurance you need encompasses not only the amount of your disability benefit payment, but also choosing the right disability definition for your policy, the appropriate maximum length for your benefits, as well as the right elimination period. Take the time to shop and compare disability quotes, and find the right policy for your needs. To get started with a free quote on disability insurance, click here today.