Before determining how much disability insurance a person SHOULD have, it is important to first understand how much coverage a person CAN have. While consumers may believe that benefit levels should be unlimited, the insurance industry is regulated and insurance carriers are cautious of how much coverage they offer. After all, if one could receive a greater income at home while on disability claim, he/she would have no incentive to return to work when possible.
The amount of disability insurance an individual can purchase is dependent on income, profession and any existing group & individual coverage. Most individuals are able to protect up to 60% of their gross income. The greater an individual’s income however, the lower the percentage that can be insured. For example, an individual earning $50,000 annually will have no problem securing 60% income protection while an individual earning $500,000 may only be able to secure 40-45% income protection.
Now knowing that the amount of disability insurance an individual can purchase is limited, we can determine how much coverage an individual should have. While the exact benefit amount that one should have is subjective, there are certain values that should be considered greatly and can create a floor for the minimum amount a person should have. Every consumer should have enough disability insurance to cover all living expenses (rent, mortgage, utilities, etc.), liabilities (car payments, student loans, commercial debt, etc.), insurance premiums (life, home, auto, liability, etc.) and savings (primarily retirement savings).
It is easy to discount the importance of having enough coverage during the purchasing process – truth be told, disability insurance is not cheap. However, you’ll never hear a person who has needed to claim disability benefits say, “Wow, I probably didn’t need this extra $1,000 of monthly benefit”. Most people go to work every day because their standard of living depends on the income they earn. For that reason, it is important to be certain that when purchasing this coverage it will provide an adequate amount of protection.
Whether you are a physician, a teacher, a police officer or any other professional, a debilitating injury or illness that prevents you from working and earning an income can be catastrophic. Unless an individual is independently wealthy, it is important to consider having enough disability insurance.