How much disability insurance do I need?

How much disability insurance do I need?

If disability insurance is right for you, consider buying as much coverage as you can comfortably afford. Disability insurance doesn’t replace 100% of your income — short-term disability typically pays between 60% and 80% of your pre-disability income, while long-term disability pays out 40% to 60%. You could go months or years without being able to bring in a paycheck if you suffer a disability.

To determine the amount of coverage you’ll need, calculate your financial obligations and what financial assets you have to rely on if you become disabled and can’t work. Assets to consider include savings, a spouse who can work or family who is willing to help. Then, fill in the gap with disability insurance.

To help put a number on the exact amount for your situation, consider the following monthly obligations you’re likely paying.

Rent or mortgage payments

Your mortgage or rent can be one of the largest monthly payments you make. While you don’t necessarily have to cover the entire cost of your mortgage or rent payment, you probably don’t want to shift 100% of the burden of paying rent or the mortgage to a spouse.

Start with an amount equal to at least 50% of your rent or mortgage payment. This can give you a starting point of how much income from disability insurance you’ll need monthly.

Dependents that rely on your income

If you have children or other dependents in your household who rely on you for income, you’ll want to factor in their monthly cost of living expenses.

Try to make a distinction between what’s necessary and what is a luxury to maintain your dependents’ quality of life. For example, a cell phone may be considered a necessary expense by some people, but not others.

Living expenses vary based on your lifestyle, but consider these items:

Your existing debt

Your debt won’t disappear if you become disabled and can’t work – your creditors will still expect to be paid. While some creditors may be willing to work with you to delay or lower your monthly payment, that isn’t guaranteed.

Factor in paying the minimum amount each month on your debt. And if you can try to pay down your debt now while you’re still working and earning a paycheck, that will be one less expense to worry about if you do become disabled and can’t work.

What other assets can I use to live on?

Since disability insurance won’t replace 100% of your income, plan on using any other financial assets you might have to live on. This may also allow you to lower the amount of disability insurance you actually need to buy, if your savings or other assets can help replace your lost income. Possible sources of income could include:

• Savings. Many people don’t have much money in savings, but putting away even a small amount of money each month into a savings account can add up over time and give you a little cushion if you become disabled and lose your income.
• Life insurance cash value. If you have a permanent life insurance policy with cash value, you could pull out some of that cash value to use for daily living expenses. Any interest or investment growth component of that cash value is taxable though, and if you pull out all of the cash value, you’ll surrender your policy.
• Investments or retirement funds. If you have an investment portfolio, you could sell your shares and receive money. Investments are generally viewed as a long-term tool to grow your money over time — but in a pinch, you can pull money out in an emergency.
• Help from family and friends. While you may or may not be willing to ask for help from family or friends, you might not want to rule out this option. Even small amounts of money can add up and make a big difference over time.
• Loans. You could apply for a short-term loan, though this is the riskiest option because interest rates will likely be high. Applying for a short-term loan with high interest is probably only an option if you are sure that your disability is short-term and you’ll be able to return to work soon to repay this debt.
• Social Security Disability income. If your disability is expected to last longer than one year, then you can apply for Social Security Disability income (SSDI). But acceptance isn’t guaranteed, and you’ll have to wait at least one year before your benefits kick in.

How can I save on disability insurance?

If your disability quote is too expensive for your budget, you can lower your premium payments in a few ways.

• Increase the elimination period. Also called a waiting period, this is the amount of time between when you file your claim and when you start receiving disability benefits. The longer you can go without collecting your benefit, the lower your premiums will be.
• Lower your monthly benefit. If you’re able to cut down on some monthly expenses and lower your cost of living, you might be able to get by with a lower benefit amount, which will lower your premium.
• Decrease the benefit period. Similar to the waiting period, the benefit period is how long your payments will last. If you think you can find other sources of income after a period of six to 12 months, then you could opt for a shorter window to claim disability checks, and only purchase short-term disability.

Compare disability insurance companies

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Name	Product	Coverage Amount	Benefit period	Waiting period	Own Occupation	Medical exam required
Policygenius Disability Insurance		$100 to $20,000	2, 5, or 10 years or until age 65 or 67	60 - 365 days	Yes	Depends on provider	Get matched with one of 15 top life insurance companies to find the best coverage and rates for you.	Go to site More Info	Compare	loading Fetching your data...
JRC Life Insurance		$500 to $20,000	2 year to lifetime	30 - 365 days	Yes	Yes	Compare policies up to $10 million from 45+ top insurance companies with the click of a button.	Go to site More Info	Compare	loading Fetching your data...
Breeze		$500 to $20,000	1, 2, 5, or 10 years or until age 65 or 67	30 - 365 days	Yes	No	Secure long-term disability insurance online by filling out an easy 10-minute application, even if you're a high income earner.	Go to site More Info	Compare	loading Fetching your data...

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Do I need short-term disability or long-term disability?

Whether you choose short-term or long-term disability depends on your financial needs and your situation. A short-term disability policy will only cover you for a short period of time, such as six months.

The average disability lasts close to three years, which means ideally you would buy both short-term and long-term disability insurance. Buying both will cost more money but ensures that you’ll receive a disability payment for the duration that you’re out of work, which could be six months or six years.

In most cases, long-term disability is viewed as more valuable because it pays a benefit for a longer period of time. So if you have enough other assets or savings to carry you for a short time, such as six months, you might just opt for long-term disability.

Bottom line

Losing your entire paycheck after a disability can put a damper in your monthly finances, but disability insurance can help offset the loss. The exact amount of disability insurance that you need should cover your biggest monthly financial obligations, such as your mortgage payment and monthly living expenses for your family.

You can compare disability insurance companies before buying a policy to find the one that best fits your financial needs.

Common questions about how much disability insurance you need

• Do I need a separate disability insurance policy if I have one through my employer?

  Your employer-based disability insurance might either be a short-term or a long-term disability insurance policy, which means you might want to supplement whichever type of policy you have. And if you’re laid off from your job, you’ll be left with no disability insurance.

• How can I replace 100% of my income?

  If you want to replace 100% of your income, it’s best to buy as much disability insurance as you can afford and then work on having enough savings to cover the rest of your income. Insurers don’t pay 100% of your predisability income mainly to prevent insurance fraud.

• Will my disability insurance stop paying me once I return to work?

  It depends on which type of policy you have. There are different return to work rules with different disability policies. An own occupation disability insurance gives you the broadest coverage and allows you to keep receiving a disability benefit after you return to work, as long as you can’t work in the same job you had before your disability.