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How much disability insurance do you need?

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Creating a financial strategy that anticipates a possible turn of events is a way of protecting yourself and your family when you need it in the future. Disability insurance is one part of that strategy. This coverage can shelter you from a sudden loss of income if an injury or medical condition prevents you from working.

Understanding how much disability insurance you need and how different kinds of coverage work can help you feel confident that you'll be ready in case something happens to you.

What is disability insurance & why is it important?

Disability insurance provides you with payments if you experience a disabling event that keeps you from doing your job. Many people who are in good health don't give much thought to being unable to work for an extended time, but the possibility may be greater than you realize. About 25% of people who are 20 years old today will experience a disability before reaching age 67, the typical retirement age.

With disability coverage, the benefit amount you'd receive depends on your contract terms. While insurance doesn't usually cover 100% of your lost income, it would replace some—typically 40% to 80%—to help you continue to provide for your household while you focus on your health. The money can be used for anything, whether it's day-to-day expenses, medical bills or helping you retain your savings.

Do you need disability insurance if you have a policy through your employer?

You might have a short-term disability insurance policy as an employee benefit through work. While this might be offered at a low cost or free, you don't have much control over it, or portability if you change—or lose—your job. The benefits from an employer-sponsored policy are typically taxable, and they may even not sufficiently cover your needs in the event that you get seriously sick or hurt. That's why it pays to double-down with an individual or supplemental policy.

How to find the right amount of disability insurance coverage

As you decide how much disability insurance you need, some expenses might be obvious to think about (like housing costs), while others fly under the radar (think minimum credit card payments). Review your budget to determine which expenses would absolutely need to be paid while you take time to regain your health. Also factor in how these expenses might change over time, such as if you have plans to buy a new home or take on other debt. Make sure you account for at least these costs:

  • Housing and utilities
  • Food, clothing and other basic daily necessities
  • Debt payments, such as for loans and credit cards
  • Medical insurance premiums and out-of-pocket medical expenses

To help calculate how much disability insurance you need, think about how your current income is allocated and what other funds besides income you have at your disposal. Asking yourself these questions can help you realistically determine what your income needs might be when you're drawing a disability benefit that's only a portion of your usual pay:

What percentage of your income goes to essential expenses?

One exercise to determine your true basic needs is to consider what you'd do if you had to live on 90% of your current income. Then revise it for 80%, and so on. Eventually, you'll arrive at the percentage of your income that's necessary to cover day-to-day needs, essential bills and debt responsibilities. This a good starting number to help you determine how much disability insurance coverage would allow your family to function financially if you had to cut all discretionary spending.

Does your household have a second income or some savings?

Having another earner in the house may change your approach to the exercise above, but consider that your disability may require that person to take time off to care for you. As for savings, building an emergency fund is a smart strategy for what-if planning, but most people don't have enough stored up to be out of work for a year or more without tapping into savings meant for other purposes, such as retirement or college costs.

Even if you have two incomes and a healthy savings stash, disability insurance is valuable. You may want to use other income and savings as supplements, but the right-sized disability benefit can help you protect your nest egg, maintain your current lifestyle and cover any extra expenses that come up, such as out-of-pocket medical expenses.

Do you anticipate your household costs to change over time?

If you're purchasing disability insurance at a life stage when you're living alone in a condo, you'll most likely have very different income needs than if you were in the thick of a 30-year mortgage and putting two children through college.

It's wise, however, when you're purchasing disability insurance to anticipate what your future needs might be. You may want to consider a disability insurance rider, like a future purchase option. This feature lets you increase your coverage later without repeating medical underwriting. Looking ahead to potential financial changes down the road can help you choose coverage that will fit you well any time you may need it.

Can your household sustain an income loss?

Income loss due to disability is one of the primary factors contributing to bankruptcy for many people. Learn more about how to protect and prevent your household from
the connection between disability and bankruptcy

Do you need short-term or long-term disability insurance, or both?

In addition to employer-sponsored and individual disability insurance, some sources also break these classes of disability insurance into "short-term" and "long-term" types. Ultimately, they offer similar flexibility and income replacement, but different benefit period lengths. This overview may help.

Type of disability insurance
How long does it last?
Who offers it?
What does it cover?
How much of your income does it replace?
What is the waiting, or elimination period?
Usually 13-26 weeks.
Typically employers, but can be supplemented or provided through individual policies.
Most illnesses or injuries.
Generally 40-100% of your base income.
Within a couple weeks after disability.
Plans vary, but often up to retirement age.
Some employers, but mostly private insurance companies in the form of supplemental or individual coverage.
Most illnesses or injuries.
Generally 40-66 2/3% of your base income through group coverage, or up to 80% by adding an individual policy.
Typically 90-180 days after disability.

A financial advisor can customize your insurance needs

How much disability insurance you need depends on many factors, including your current and future income, other financial fallbacks and your family's needs. The amount of disability insurance that fits your situation may even be more affordable than you think. A Thrivent financial advisor can help you calculate your ideal disability coverage and create a contract that can provide for you and your family when you need it most.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Riders are optional and available for an additional cost. 

Insurance contracts have exclusions, limitations and terms under which the benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, contact your licensed insurance agent/producer.

Guarantees based on the financial strength and claims paying ability of the contract issuer.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.