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How much is enough when it comes to disability insurance?

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Last time, our blog discussed some rather eye-opening figures from the Council for Disability Awareness in the hopes that it would help working adults of all ages better understand the risk of disability and, by extension, the importance of securing insurance to help prevent financial disaster in the event of the unimaginable.  

This naturally raises the question, however, as to just how much disability coverage a person actually needs and what, if anything, they can do to arrive at this crucial determination.

The good news is that experts have identified a sort of framework designed to help prospective buyers address this very issue. While by no means definitive, it nevertheless identifies some issues worthy of consideration.

Step One

The first step is to retrieve any existing disability policies and carefully review the details. For many, the only policy to review will be their employer's group plan.

When conducting the review, experts indicate that prospective buyers must keep in mind that disability insurance is designed to cover anywhere from 60 to 70 percent of income. Furthermore, they advise finding answers to the following questions:

  • How does the policy calculate income? Are bonuses and/or commissions included?
  • Does the policy have any sort of cap on income replacement?
  • How long does the policy pay benefits? Does it have an inflation rider?
  • Would benefits paid under the policy be offset by Social Security benefits?
  • How does the policy define disability?

Step two

While taxes might be the last thing on a prospective buyer's mind during this review process, experts indicate that it's an extremely important issue. That's because if the premiums for an existing policy are being paid by the prospective buyer with after-tax dollars, then benefits are not taxable. However, if the premiums are paid by an employer, then benefits are indeed taxable.

Step three

Once prospective buyers have gained a comprehensive understanding of their policy and its potential tax ramifications, experts indicate that the third step should be to create a makeshift list of regular expenses, and a makeshift list outlining all possible income streams from benefits under the disability policy and spousal income to investments and savings.

In the event there is a sizeable gap between the two and/or any lingering doubt concerning the terms or scope of the policy, experts indicate that the purchase of supplemental coverage might need to be considered.

Here's hoping the foregoing information proved helpful. Indeed, even if you ultimately determine that there's no need to purchase additional coverage, you'll at least become that much more familiar with your existing disability insurance.  

Source: WMUR, "Money matters: How much disability insurance coverage do I need?" Marc Hebert, November 10, 2016

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