How FIRE followers can use disability insurance to keep their goals on track.
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 disability insurance, even if you become unable to work, your plan to reach financial independence stays on track.
Disability insurance protects your income if you can no longer work, and you need disability insurance no matter when you plan to retire. But disability insurance during the accumulation period can be essential for people trying to FIRE.
Your income — present and future — is your greatest asset. 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.
When shopping for DI, many people just want coverage between now and their target retirement age. Many disability insurance policies include coverage through age 65, which may seem like overkill since you’re hoping to be retired well before then. But you can always reduce the benefit period as you get closer to your target to save on premiums (more below).
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 (see below).
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 during the accumulation period need enough to cover expenses and reach your savings goals.
Because disability insurance is about protecting yourself from risk, the question to ask is: what if a disability meant that I stopped earning tomorrow?
You may be just a few years away from FIRE, but if you’re still relying on your income for living and saving, you need to cover as much as that income as possible from day one of your policy.
As your savings increase, you can reduce your coverage and your premiums on your disability insurance policy, but you generally cannot increase it without going back into underwriting, which means another medical exam and higher rates (though there is a rider that you can add that allows you to increase your benefit — more below).
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 (this is because the available disability benefit periods are 2 years, 5 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 (see below).
While it’s important to start out with the max amount of coverage to help you reach your goals if you were to become disabled tomorrow, there are ways to reduce your disability insurance premiums:
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, 5 years, or 2 years. There is no limit to the number of times you 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.
For example, a healthy 42-year-old male would pay $130 to $176 per month for a $5,100 benefit amount with a waiting period of 90 days and a benefit period to age 65. If you lower the benefit to just 10 years, the premiums decrease to $121 to 154.
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 even 365 days, you can greatly 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.
For example, a healthy 42-year-old male would pay $130 to $176 per month for a $5,100 benefit amount with a waiting period of 90 days and a benefit period to age 65. If you increase the waiting period to 180 days, the premiums decrease to $119 to $162. If you decrease the waiting period to 356 days, the rates go down to $106 to $143.
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.
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, any rider that is offered as no-cost, you should take. But there are three especially we want to call out as must-haves:
Ensures that your policy premium prices are locked-in, and that the insurance company can’t cancel it or change the terms for any reason as long as you pay your premiums. Without this rider, your carrier can increase your premiums.
Own occupation policies define a disability as the inability to 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 do 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.)
Allows your policy to pay out partial benefits if you can still work, but an illness or injury has reduced your income.
Again, any other riders that are free you should take, but other riders are generally not necessary and could needlessly increase your premiums. There is one exception if you’re young, and that’s the future purchase option rider, which allows you to also 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 increase in income and charge you by the rate table of your original policy.
Select carriers offer what’s called 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 by 60% to 100%.
If you’re planning to 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:
If the premiums for your group insurance plan are paid with pre-tax dollars or paid by your employer, the benefit will be taxed, leaving you with a lower benefit amount, which could mean that you won’t be able to save enough to reach your goals if you become disabled. 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.
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. (Unless you retire, more below.)
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.
When you're retired, the definition of disability changes if you have an own-occupation policy. After retirement, you'll have to be too disabled to do any kind of work; many carriers call this total disability. If you do end up needing to make a claim after your have retired, the benefit payments could help with medical expenses, for example.
Logan Sachon is the co-founder of The Billfold, a groundbreaking personal finance site for millennials that was named one of Time's 25 Best Blogs of 2012. Her work has been published in New York Magazine, Glamour, The Guardian, BuzzFeed and more.