You know the basics: long-term disability insurance (LTDI) can act as a form of income replacement if you experience a disability that stops you from working. But disability insurance only replaces a portion of your total income: approximately 60% is right for most people.
When you’re shopping for a policy, you can specify what you want your benefit amount to be. You can and should request a benefit equal to about 60% of your pre-tax salary, which will be close to your usual take-home pay.
How to calculate the ideal benefit amount
Before you start shopping for a long-term disability policy, it’s worth taking a look at your budget to figure out exactly how much you would need every month if you lost your job due to a disability. Remember, you not only need enough to keep the lights on but also to cover any medical bills resulting from your disability that your health insurance doesn’t cover.
The 60% will roughly equal your take-home pay because, unlike your salary, the benefit amount from a personal disability policy is not taxed as income.
An agent at policycentral can make it easy to determine how much disability insurance you need. But, first, compare long-term disability insurance policies online to find a quote that fits your budget.
Here are a few things to keep in mind when calculating your ideal benefit amount:
Can you still earn an income?
Depending on the type of policy you have, you may be able to purchase less coverage, meaning your long-term disability insurance will pay you less if you become disabled. That’s possible if you have an own-occupation long-term disability insurance policy, which means that you only need to be so disabled that you can’t work at your current or most recent job.
Own-occupation policies are more expensive because they that have a higher likelihood of paying out; however, you’ll be able to work another job that you’re qualified for and still get paid disability benefits.
The opposite of an own-occupation policy is an any-occupation policy. This type of policy pays disability benefits only if you can’t work at any job. This is a much stricter definition of disability to meet, so any-occupation policies have lower premiums, but may not offer the amount of coverage you need.
Cover your fixed expenses
There are certain fixed expenses that you pretty much know you need to cover every month, like mortgages, groceries, and utility bills. Calculate about how much of your income you use on fixed expenses. Use this as your baseline benefit amount that any LTDI policy needs to meet.
Try to include some discretionary expenses
Books, movies, music, and other types of entertainment are typically not covered by your fixed expenses, but it's useful to factor them into your budget when choosing you disability benefits. Same goes for other small luxuries, like eating out.
Factor in possible disability-related costs
Your health insurance will probably cover most of your care for an injury or illness. However, many people have to pay a high deductible before receiving care or have a health insurance policy that doesn’t cover every medical expense.
Since you may not be earning an income while disabled, your LTDI coverage should be high enough to get you the care you need and help you recover.
What if I’m shopping for supplemental disability insurance?
If you already have a group long-term disability policy through your job, you may be looking to supplement it with a private long-term disability policy. In this case, you should look at the benefit you’re already receiving and see what percentage of your after-tax income it covers.
Assuming it doesn’t cover at least 60% of your income, you should figure out what your private benefit amount would need to be in order to get you, in total, 60% of your income from your two LTDI policies.
Group LTDI benefits are taxable if the premiums are paid by your employer. Make sure you factor this into your math.
What if your ideal benefit amount is too expensive?
In some cases, it may be prohibitively expensive to get your ideal benefit amount. This typically happens if you work in a risky occupation or have had prior health issues.
There are some things you can do to help make your long-term disability insurance policy more affordable.
For starters, you can try reducing your benefit period. The benefit period is the amount of time you’ll receive benefits. The longest benefit period you can get is up to your retirement age (age 67 or 70, depending on the insurer). But you can save some money by reducing your benefit period to 10, five, or two years.
You can also try increasing your elimination period. The elimination period is the period of time between when your disability starts and when your insurance company starts paying out benefits.
More expensive policies have elimination periods of either 30 or 60 days. You can save a little bit of money by switching to a 90-day elimination period without affecting how much your LTDI policy pays.
However, if you don’t have enough emergency savings to cover the six months between when you stop receiving a paycheck and when your insurance policy kicks in, a long elimination period can be disastrous.
If you choose this option, make sure you’re covered either by emergency savings or a short-term disability policy. If neither of these options lowers your premium enough, you’ll need to reduce your monthly benefit amount.
