Most people consider their most important asset to be their home or their retirement savings. The reality is, though, that your most important asset is actually your ability to earn an income. This is why nearly everyone who depends on their ability to earn incoming wages from a job should consider owning a disability insurance policy.
Many disability insurance policies that are available in the marketplace will cover at least 60% of the policy holder’s gross income amount. Yet, the ability to maintain your current lifestyle may require more than that.
In many instances, one should actually consider replacing closer to 80% of his or her gross income amount with disability insurance coverage. But because all situations are different, your specific circumstances may require considerably more or less, depending on a few select criteria.
Insuring the Right Amount of Income
There are several factors to consider when determining the actual amount of disability insurance benefit to apply for. These should include the following:
- Average monthly living expenses – including rent or mortgage, utilities, transportation, healthcare, food, and other household costs;
- The effect of inflation on expenses in the event of a longer-term disability;
- The approximate length of time that your current savings could maintain your monthly expenses;
- How a short- or long-term disability could affect your retirement savings.
If your current savings are able to sustain you for several months, you might want to consider a longer waiting, or elimination, period before the policy’s benefits begin. This will help to keep the premiums lower. Conversely, if savings are slim – or, if you prefer to keep your emergency fund intact for other issues – a shorter elimination period could be chosen.
Once you have a better idea of how much income you will need to replace each month, you should also factor in the likelihood of needing inflation protection. Having this rider on your disability insurance policy can help to adjust the ongoing income benefits for rising inflation – which can be particularly important should you encounter a disability over the long term.
If You Return to Work
In some cases, an individual who is disabled regains the capacity to perform certain job related tasks. Therefore, in the event that you are able to return to work on a part-time basis or in a different role, a disability insurance policy that also offers coverage for partial disabilities should be considered. This way, the potential gap that exists between your new income amount and your former amount of wages may be more adequately covered.