Disability insurance and FIRE

FIRE followers can use disability insurance to keep their goals on track in case of an unexpected injury or illness.

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Amanda ShihEditor & Licensed Life Insurance ExpertAmanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

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The core principle of FIRE — financial independence, retire early — is saving. That means keeping overhead costs as low as possible, which is why it’s tempting to eschew disability insurance.

But disability insurance, while technically optional, is essential for people hoping to retire young. You’ve spent a lot of time and work saving and planning to retire early. With long-term disability insurance, even if you become unable to work, your plan to reach financial independence stays on track.

Why you need disability insurance to support FIRE

Disability insurance protects your income if you can no longer work, and you need disability insurance no matter when you plan to retire. But if you’re planning to retire early, your income makes that possible, and you need that income to stay steady to reach your goals.

Disability insurance ensures that you keep your income and your savings portfolio if you become disabled during the accumulation phase, and allows you to stay on track to retire when you plan to.

The goal of FIRE planning is to get to a point where you have financial leverage and don’t need insurance at all. When that happens, you can cancel your policy.

What disability benefit period do FIRE followers need?

Nobody wants to pay more for coverage than they need, but while many people only need enough disability insurance to cover their expenses, FIRE followers purchasing disability insurance need enough to cover expenses and reach their savings goals.

To decide what benefit amount you need, ask yourself: At your current income, how long until you reach your FIRE goal? Your benefit period needs to be set to how long you have left to save before you reach FIRE.

So if you’re 10 years away from FIRE, you may be able to set a 10-year benefit period. But if you’re 15 years from FIRE, you’ll need to set your benefit period until 65 (because the available disability benefit periods are two years, five years, 10 years, to age 65, to age 67 and to age 70). You can lower the benefit period when you get closer to your goal.

As your savings increase you can reduce your coverage, but you generally cannot increase it without going back into underwriting, which means another medical exam and higher rates.

How to reduce your disability insurance premiums

While it’s important to start out with the maximum amount of coverage to help you reach your goals, there are ways to reduce your disability insurance premiums:

1. Lower the benefit period

The most robust disability insurance policies will pay benefits until you are 65. But as you get closer to your FIRE goal, you can lower your benefit period to only pay for 10 years, five years, or two years. There is no limit to the number of times you can lower your benefit period, but you can never increase it, so it’s important to consider whether the decrease in premium is worth the loss of future benefits.

2. Increase the elimination period

The elimination period, also known as the waiting period, is the time you have to wait between a diagnosis and when you can start receiving benefits. The most common disability insurance elimination period is 90 days, but if you increase the disability premium to 180 or 365 days, you can reduce your premiums.

If you have enough accessible money to cover both your day-to-day expenses and still meet your savings goals, this can be a good option. You can also do this after you have the policy as you save more.

You can find out about how much your own premiums would cost by using our disability insurance calculator, which also shows you how adjusting benefit period and elimination period adjusts your premium.

Disability insurance riders for FIRE followers

There are several riders you can add to your disability insurance policy to change your coverage. Some riders are free and included with your policy; others increase your premium payments. Generally, you should accept any rider that is offered at no-cost. But there are three worth calling out as must-haves:

1. Guaranteed non-cancelable rider

This ensures that your policy premiums are locked in, and that the disability insurance company can’t cancel or change the terms of your policy for any reason as long as you pay your premiums. Without this rider, your insurer can increase your premiums.

2. Own-occupation coverage rider

Own-occupation policies define a disability as the inability to work in your current occupation, even if you can technically do another occupation. The opposite is an any-occupation policy, which defines a disability as being unable to work any occupation, which is a much harder definition to meet. This rider only lasts as long as you are working; once you retire, the definition of disability reverts to any occupation.

3. Residual disability coverage rider

This allows your policy to pay out partial benefits if you can still work, but an illness or injury has reduced your income.

One rider that's worth considering even though it requires an extra premium is the future purchase option rider. This rider allows you to increase your coverage without reapplying and going through underwriting. If you are early in your FIRE planning and expect your income to go up significantly, this rider would allow you to increase your benefit amount to match any income growth without paying higher rates due to age or illness.

A note on return of premium riders

Some providers offer a return of premium rider, which returns a percentage of your paid premiums to you if you cancel your policy. This sounds tempting, but it’s not worth it — return of premium riders can increase your disability insurance premiums significantly.

Long-term disability insurance vs. group coverage

If you’re pursuing FIRE, it’s worth considering purchasing a private long-term disability insurance policy even if you also have coverage through your employer’s group insurance plan. You should certainly accept free coverage, and it’s better than nothing, but to protect your income and savings goals, a private long-term disability policy offers more coverage. Here’s why:

1. Group plans mean taxed benefits

If the premiums for your group insurance plan are paid with pre-tax dollars or paid by your employer, the benefits are taxed, leaving you with a lower benefit amount. If you get some disability coverage through your employer, at minimum you need supplemental coverage to ensure you’re at the maximum benefit amount.

→ Read more about disability insurance and taxes

2. Group plans are significantly less robust

Many group insurance plans are only own-occupation for two years — meaning if the insurance company deems that you could do any job that isn’t your current job, you could lose all benefits after two years. If your private policy is an own-occupation policy, it stays that way throughout the policy.

Canceling disability insurance while following FIRE

Many FIRE followers drop their long-term disability insurance after they retire. That makes sense: When you retire, you no longer have income to protect, and you can save on that premium payment.

But if you think there’s a possibility that you’ll need an income in the future, it could be worth it to keep your policy even if you’re not working.

If you have an own-occupation policy, the definition of disability changes when you retire. After retirement, you'll have to be too disabled to do any kind of work; many providers call this total disability.

→ Find out how to cancel your disability insurance policy