Continue reading to find out how you can decide what coverage you need. As a financial advisor, I spend a lot of time helping clients prepare for unexpected events that could affect their financial well being.
The surgery went well and I did not need any long-term disability benefits. What if it wasn’t so good? Imagine if my recovery from surgery took me at least a year. What if I was diagnosed with cancer? What if I couldn’t get around on my feet?
Additional income when you most need it
When DI can replace most of your monthly income, and in conjunction with your employer’s long term disability insurance, it is the most cost-effective and efficient, DI can be very useful. If your employer doesn’t offer disability insurance, or you are self-employed it could be the only thing that can stop you from extreme financial hardship.
However, DI can be costly. It can cost anywhere from $1,000 to $3000 per year depending on your age, health, and requirements. It was important to consider how DI fit in my overall financial picture.
What about Social Security Disability Benefits?
It is possible to believe that Social Security will provide safety net for you if your disability becomes permanent. You may be eligible to receive Social Security Disability Insurance benefits (SSDI) until you reach full retirement age. After that, benefits will transition to Social Security retirement benefits. To be eligible, you must have paid Social Security taxes. The Social Security Administration has strict requirements regarding eligibility for SSDI benefits.
My DI voyage of discovery: What steps did I take
As a financial planner, I have extensive experience in analyzing the cost/benefit of various asset protection options for clients. It was now my turn to do it myself.
Compare monthly income requirements to disability insurance payments
To estimate how much income I would need for various stages of my life in the event that I was disabled, I began by estimating how much I would need to make a living. In my calculations, I also included medical expenses as well as other support services.
It was easy to calculate my monthly DI payments to make ends meet. I simply subtracted my monthly income from my company from the total I would need. This was the monthly amount that I wanted DI to cover.
Finalize the coverage length
Next was to determine how many years worth of benefits I would need in the event that I become permanently disabled. Most DI policies have payment periods of between two and five years. However, you can extend the duration of your policy as much as you wish.
The premiums will be more expensive if the payment period is longer. However, I love my job. I would be unable to do it anymore and I would like to be compensated for any lost time. So I decided to take the maximum.
I am in my 40s, and I would like the payment period to continue until I retire at age 67. I would receive around 20 years of payments in the worst case. If I didn’t file a claim, I would have to pay premiums for the next two decades. It may seem excessive but it is really not. The same period is covered by my term life insurance policy. I would get financial benefits if I was still alive if I had DI.
Take into account additional features
After I’d decided on the amount of coverage and the duration of the benefits, it was time for me to examine the cost of some features.
Long-term disability benefits typically kick in after 90 days, which is usually the time that short-term benefits expire. Longer waiting periods are generally more expensive for insurers. I chose a six month waiting period because I knew that I could, in the worst case scenario, use my emergency fund money during this time. This risk was worth it for me in return for substantial savings on premiums over the policy’s life.