How Much Disability Insurance Do You Really Need?

Recently I met a woman who had two disability policies. She had bought one on an individual basis years earlier when she was self-employed as a realtor, but now she was working for a plumbing contractor who offered disability insurance. We had a discussion about whether or not she could collect benefits with both insurance companies in the event of a claim.

As a matter of fact, she could collect from both insurance carriers, but with a caveat. You see, the insurers don't want people making more money being disabled than when they were working, so they have a "combined limit" on the total benefit. Generally, insurance companies will allow you to insure between 60% and 80% of your total pre-tax income across all policies combined.

Usually, the group policy has an "offset" clause. This means the group plan might reduce its payout if you receive money from other sources like Social Security. However, a high-quality individual policy is typically "non-cancelable and guaranteed renewable" and usually does not reduce its payout just because you have a group plan.

With all of this in mind, a lot of people will buy just enough coverage to make the mortgage or rent payment. They may have some savings put aside (hopefully for retirement), and are willing to dip into for an emergency. We recommend the M.U.G. (mortgage/utilities/groceries) method of calculating your need. Add those three items together to determine a good amount.

We also offer a worksheet for you if you'd like to calculate how much you need. It's short and can help you plan for the unexpected. 

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. Please subscribe to this blog!