How Much Disability Insurance Should You Have?
The amount of individual disability insurance you should buy depends on three things:
how much income you'll need if you become disabled, whether you'll receive disability benefits from a group policy or the government, 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 the following :
Medical expenses
You can expect your medical expenses to rise when you suffer a disability. Assuming 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.
Of course, you can elect to continue coverage through COBRA, but you'll have to pay the premium yourself. 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 your disability.
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 you and your spouse both work, you know how expensive child care is. Can you afford to pay for it if you or your spouse become disabled and are no longer employed? 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 expense.
Find out what disability benefits you're already entitled to
Through government programs and group insurance through your employer or an organization, you may already be covered by some disability insurance. However, relying on these types of insurance can be dangerous; government plans often pay benefits under strict definitions of disability, and group insurance may not be comprehensive, offering only short-term or long-term benefits. Both types of insurance may pay you only a small portion of your current salary. Review the forms of 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.
If you need more disability insurance, how much should you buy?
Once you've decided that you need to buy more disability insurance, you should aim to replace the income 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 insurance you can purchase, based on your income, health, sex, 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 always buy less than this amount.
