Disability Insurance: How Much Is Enough?

Anyone who depends on his or her income for living expenses should consider purchasing disability insurance. How much income to cover in a disability insurance policy depends on several considerations.

Many disability policies cover at least 60% of the insured’s gross income. But maintaining one’s lifestyle may take more than that.

In fact, it is a good idea to buy disability insurance that replaces closer to 80% of gross income.

Some things to consider when determining the amount of benefit are typical monthly expenses, how long savings dollars could maintain monthly bills and how a disability could affect retirement savings.

With these things in mind, a better determination of the elimination period – the waiting period before benefits begin – can be chosen.

Most disability insurance policies offer elimination periods ranging from 30 days to one year.

Another key consideration is how long the policy will pay benefits. Although many disabilities last 90 days or less, others can be permanent.

Therefore, it is a good idea to look into coverage that will extend benefits to at least age 65.

Keep in mind that if a disability persists for the long term, living expenses are likely to rise. Therefore, adding an inflation protection rider on the policy can help to adjust the benefits for inflation during a long-term disability claim. In case the insured is able to return to work part-time or in another capacity, a policy that provides coverage for partial disabilities should be considered.

This way the gap between the new income amount and the former income amount can be covered.

As many workplace policies are capped, benefit coverage may fall short.

Therefore, even if an individual has an employer-sponsored disability insurance plan, it may be wise to consider supplementing it with an individual policy.