How much disability insurance do I need?


You need enough coverage to live off of if you happen to lose your job while disabled, and you should also factor in your bills and loan payments too.

Disability insurance is meant to protect you from the financial burden of losing your income in the event that you become disabled and can’t work. Think of it like income replacement. When you’re not getting a paycheck due to disability, you’ll get a monthly benefit from your insurance company. The amount of this benefit is called coverage, and the amount of coverage you need depends on a variety of factors such as your occupation and financial obligations.

The disability benefit is based on your actual wages, and it can be as high as 60% to 70% of your paycheck. For that level of coverage, you can expect to pay between 1% and 3% of your annual salary in premiums, with the amount varying based on how much coverage you’re hoping to buy. You’ll also want to take into account how long you want to receive checks, which is called the benefit period, and you could pay less in premiums if you go with a disability insurance policy that has a longer elimination period, the length of time before benefits kick in.

The riskier your job or lifestyle, the greater the likelihood you’ll wind up disabled, so you should plan ahead to have more coverage. Even then, if you live a fairly low-risk life, you could still fall prey to unexpected illness that may cripple your finances. 90% of disabilities stem from illness rather than injury, and medical bankruptcy accounts for 60% of all personal bankruptcies in the US. The amount of coverage you need should be enough not only to live on but also to pay for bills and loans, and it should leave you with enough funds left over should you lose your job while disabled. Read on to learn more:

Disability insurance coverage for expenses

One of the most important things to account for when deciding how much disability insurance you need is what your day-to-day expenses look like. Everyone has financial obligations, such as paying for a mortgage or rent, paying off student loans or car loans, or medical bills. Failing to pay these could result in losing your property, hurting your credit score, or accumulating unmanageable amounts of interest.

When you take out a disability insurance policy, you need to make sure the benefit is high enough to cover your bills and loans so you can keep up to date with them while you recover. Calculate how much you pay each month for your expenses and extrapolate from there – the amount could be hundreds to thousands of dollars, and you need to make sure your disability coverage is high enough to match that.

People with advanced degrees are especially in need of disability coverage. That’s because they have frequently the highest amount of student loans to pay back. You also need disability insurance if you just bought a home; the benefit will protect you from having to default on your mortgage payments when you’re no longer drawing an income due to disability.

Disability insurance coverage to replace your income

You can’t predict when you’ll be injured or become ill, so you can’t predict how long such a disability will put you out of commission. During that time, you’ll still need to put food on the table and live as normal a life as you did before the disability struck.

For that reason, you also need to take your income into account when figuring out how much disability insurance you need. If you’re used to living the lifestyle of a surgeon or Wall Street trader, losing your income can be a considerable blow to your comfortable existence. Luckily, disability insurance benefits can be as high as $5,000 to $10,000 per month. You’ll have to a considerably higher premium, but if you need that much coverage you can probably already afford it.

Disability insurance can also be necessary for people on the other end of the income spectrum. You can buy coverage with a lower premium that’ll pay out a smaller disability benefit. Although you won’t need to replace as much income, you’ll still need to ensure that you can afford the same necessities you paid for before becoming disabled.

Because your disability may have resulted in high medical bills, you may want to actually get coverage that exceeds your monthly take-home pay. The beginning of your coverage may coincide with these increased expenses, so you may have unexpectedly higher costs at the same time you start claiming the benefit.

Disability insurance premiums aren’t exactly cheap. A prime candidate for disability insurance is someone like a doctor, who has very high student loans to pay off, requires a lot of physical and mental labor to practice his or her job, and can expect to earn a high income when his or her residency is complete. If the doctor waits until after residency to buy it, when he or she is older, her premiums will be considerably higher.

Disability insurance coverage to put in savings

Another thing to account for is the precarious economy. When a lot of people are looking for work, it’s easier for your employer to replace you if you have to take a leave of absence due to your disability. You should have enough savings to tide you over during periods of unemployment, and you can put your disability benefit toward a savings account.

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Disability insurance is meant to replace your income when you become disabled.

Note that that doesn’t mean a tax-advantaged retirement account, like a Roth IRA. You can only contribute to such accounts with “earned income,” which means wages and tips – income that can be taxed. Disability insurance benefits are unearned income and they’re not taxed unless your premiums were made with pre-tax dollars. If you try to use a disability benefit to fund a tax-qualified account, you could be assessed a penalty by the IRS.

So if you do stash away disability insurance benefits, put them in a deposit account such as a CD or a savings account. You can also use the benefits to buy stocks. But you should only do this once your other financial obligations are covered. It could provide a little bridge between jobs if you lose yours while disabled.

Disability insurance coverage to protect against chronic illnesses

There is little that is predictable about how much disability insurance coverage you need. You can hedge against dollar amounts like income and rent, but you can’t usually predict when you’ll become sick or disabled. But if you're worried about contracting a chronic illness, you can plan ahead when deciding how much disability coverage you need.

Chronic illnesses don’t need to be physiological to qualify for disability insurance benefits, although they frequently are: Crohn’s disease flare-ups, for example, may put you out of work if the pain is too debilitating. Mental disorders may also make you eligible for disability insurance benefits if one interferes with your ability to work.

Most disabilities are actually caused by such chronic conditions, not accidents, and usually occur outside of the workplace. But be careful! Some disability insurance companies exclude these illnesses from coverage outright, and any chronic illnesses that you had before you got coverage -- pre-existing conditions -- will be excluded from coverage when you file a claim.

Similarly, if you know one of your hobbies has the chance of making you permanently disabled, you can plan ahead for that as well. By purchasing enough disability insurance coverage, you can future-proof yourself while you’re healthy and able from the chance of losing your income later in life.

Long-term or short-term disability insurance?

When deciding how much coverage you need, you’ll have to determine the type of policy you need as well. That means choosing between long-term and short-term disability insurance. The difference is the length of the benefit period: short-term disability insurance lasts for just a matter of months, while long-term disability insurance lasts for many years.

Many people already receive short-term disability insurance through their employer at low or no cost. But if you buy it independently you won’t save a huge amount over buying long-term disability insurance, so it may be wise to hedge your bets that if you become disabled enough to need to replace your income, you can expect the disability to last a long time.

As with life insurance, the earlier and healthier you are when you buy disability insurance, the cheaper it will be.

Sample disability insurance rates

A 35-year-old man, Daryl, can expect to pay $160 to $190 per month for a long-term disability policy that lasts until age 65 and pays $6,250 per month in benefits. The plan is question is an individual plan, not one offered through his employer that is intended to fully replace his income. Everyone’s need differ, so this range should be taken only as a starting point to understand how coverage works.

The factors that go into that range are as follows:

  • Occupation. In this sample, Daryl works a full-time job as a cybersecurity consultant, a career he’s had since graduating college. He is not the owner of the business.

  • Income. His income is $130,000 per year.

  • Benefit amount. As mentioned above, the benefit amount should be enough to replace 60% of your income, which, after accounting for taxes, should be close to your take-home pay. Daryl should get $6,250 per month.

  • Waiting period. Also known as an elimination period, the waiting period is the amount of time Daryl will have to wait until he starts receiving the benefit. Insurance companies charge more for shorter waiting periods, but longer waiting periods could place a financial burden on someone who needs the cash sooner. Policygenius recommends a 90-day waiting period.

  • Benefit period. The shorter the benefit period, the cheaper the premiums will be. Disability insurance companies offer long-term coverage that lasts until you retire, and Daryl could save on premiums if he chose a shorter benefit period, but he opts to protect himself until age 65.

  • Health. Daryl is at the peak of health. He has no pre-existing conditions, which may not be covered by disability insurance, and he has none of the major medical conditions that life insurance companies look for. He’s of average height and weight, doesn’t use tobacco or marijuana, and hasn’t been a reckless or drunk driver. You may not be so lucky, so adjust your expectations for your premiums accordingly.

  • Yes to own-occupation coverage. While own-occupation coverage is more expensive, this is a necessary part of any disability insurance policy. Own-occupation coverage means the disability insurance company will pay out a benefit if you are unable to do your own job, but still able to work in other jobs. This means you can still earn an income and collect benefits. If Daryl becomes too disabled to continue being a cybersecurity consultant, but is able enough to work as a bitcoin miner, he won’t lose coverage. Without own-occupation coverage, he will have to prove that he can’t work any occupation in order to receive his benefits.

  • Yes to residual disability coverage. This will also add to his premiums, but it will help pay for partial disability.

  • Yes to non-cancelable coverage. With a non-cancelable policy, Daryl will be covered as long as he keeps paying the premiums. The insurer can’t cancel or modify his policy, premiums, or benefits. It will also increase his premiums, but it’s worth it.