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How Much Disability Insurance Should I Own?

First of all, if you are reading this blog you have some interest in protecting your income in the event you become disabled. Disability insurance  (DI) is often referred to as Income Replacement Insurance, but in reality it’s not the income people want to protect; it’s their life style and assets they wish to protect.

While many business owners and employees are covered through Group Insurance at work, many self-employed business owners and professionals are either not covered or fail to keep their policy in pace with their growing income year after year.

The amount of coverage one owns with Group Insurance is often predetermined by a formula or a set amount in the group contract, set by your employer. If this is the case, you often don’t have a choice or voice to change the amount- even if the monthly benefit is not enough.

People without “Group” Insurance can determine the actual amount of coverage they want to purchase up to an “issue limit” based on their insurance company’s guidelines.  Generally the amount offered to professionals and business owners offered in the “issue limits chart” is satisfactory.

The coverage available for those buying a policy personally is based on your net income before tax. As your income increases, the coverage available as a percentage of your net income decreases. The theory here is that disability coverage is not necessarily intended to replace your income totally; if it did, the motivation to return to work diminishes.

Let me illustrate an example: if your net income (before tax but after business expenses) were $75,000 a max limit might be around $4,200 per month tax free. If your income were $150,000 the max would be around $7,000 per month.  



An immediate question that arises is: Do I need the maximum limit? Also when making this decision, other important questions may arise, such as: Does your spouse produce an income? What are your monthly fixed obligations? What is the lowest amount you could live on, and would you be happy with that amount?  Do you have children and what are their expenses? At the time of disability would you want to lean on your savings or other assets, or leave savings for retirement purposes?  Do you have other non-earned income? These are only some of the questions you should ask yourself, but the answers help make the determination.  

If a disability lasts for 90 days or longer, the average person will remain off work for 2-3 years. If your income was $75,000 per year and you have a growing family, your availability to cash and credit may be exhausted very quickly without the maximum disability coverage lending credibility to the theory of holding as much disability that is offered.

So in short, own enough to maintain your life style.

Disability plans can be designed to fit one’s budget and provides coverage that protects you in the event of a long or short term disability. With everything on the line you need to protect everything you work for.

If you are in Nova Scotia and would like some insurance advice, please contact Corry Collins:
corry@maritimewealth.com
902-444-7000

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