The standard is 40 to 60 percent of your taxable income, depending on your earnings, Green said. To decide how much you need, look at other sources of income. Today, there are usually two incomes in a household, Green said, so look at your spouse’s earnings, and determine your monthly expenses.
“Some people look at savings as their income source,” Green said. “But if expenses incurred while disabled are above your typical living expenses, you don’t want to divest yourself of all your savings, and then not have anything to live off of in retirement.”
Pareto said to determine your personal bottom line. “If you are unable to work for an extended period of time, or forever, would you be able to survive on 60 percent of your income? Probably not,” Pareto said. “Shoot to cover 100 percent of after-tax income.”
This option will adjust your benefits for inflation.
“You’ll spend more for this option, but it’s important, depending on your age,” Green said. “The younger you are, the more important it is. The older you are, the less important it becomes.”
Residual or partial benefits
This option pays you a partial benefit if you are not fully recovered and want to work part-time. “It certainly helps you if you’re trying to get back to work, and there is a period of time when you’re not 100 percent disabled anymore,” Reshefsky said. “Most individual carriers today include residual coverage.”
Transition benefits can help those in certain jobs, such as commission-based work, Green said. A salesman who is disabled for six months may get 100 percent better and go back to work, but his income is way down. Transition benefits can help make up the gap as income grows to pre-disability levels.
Non-cancellable or guaranteed renewable
A non-cancellable policy has set premiums for life. A guaranteed renewable policy’s premiums can be raised by an insurance class, but not by an individual’s circumstances.
Non-cancellable policies start off more expensive, Green said, “but we’re not really talking a large increase,” he said.
“Non-cancellable is the most beneficial feature of an individual policy,” Reshefsky said. “If I’m 25 years old and just entering the workforce, and can buy a policy, I don’t have to prove insurability again.”
An elimination, or deductible, period of 60 to 90 days is the most popular. A 30-day period is much more expensive, Green said.
“If a person has an emergency fund, which everyone should have, they should look at the premium and ask themselves, ‘How much more am I paying to self-insure for 30 days?’ ” Green said.
Reshefsky recommends buying the longest elimination period you can afford. “The higher the elimination period, the lower your premium,” he said. “It’s like buying a health-insurance premium with a $5,000 deductible, instead of a $500 deductible. Your premium will be lower.”
Taxed vs. tax free
With disability, it depends on who is paying the premium, if your company is paying the premium through a group policy, the benefit is taxable, he said. If you pay the premium, the benefit is tax-free.
“Sometimes, employers will give you the option of having the premium they pay for you classified as your income,” Green said. “And if they don’t mention it, ask if it can be done.”
The big picture is risk management, Pareto said. “How much good does it do to plan for retirement, if it’s all going to be sucked up by some unforeseen accident that leaves you unable to support yourself financially?” Pareto said. “This fills in the holes — the unknowns that could sabotage the best financial plan you could ever assemble.”