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Do I Need Long Term Disability Insurance?

by retirebyforty on September 2, 2013 · 3 comments

in Guest Posts

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disability program ticket to early retirementOver the last month, I have been furiously hunting for an affordable life insurance policy. This is ongoing and I’m waiting for the latest accurate quote after getting a blood test. So the life insurance policy is on the way to completion and it’s only a matter of time. While researching life insurance, I thought more about insurance in general and now I’m wondering – Do I need long term disability insurance?

I had long and short term disability insurance at my old job, but now that I’m self employed, I don’t have any coverage. The disability insurance policies were a necessity for income protection because we depended on that income when I was working a corporate job. When I transitioned to self employment, I didn’t think I really needed disability insurance because I didn’t make much money.

Government Safety Net

The Social Security and Supplemental Security Income disability programs provide assistance to people with disabilities in the United States, but the payment only averages about $13,000 per year. It is also quite difficult to qualify for the programs and usually takes at least 3-5 months. The benefit is not much, but it would be helpful if I ever became disabled.

When I first became self employed, I didn’t even make $13,000 per year so I figured the government safety net would be enough if we ever need it. Of course, I’d rather be healthy and make money on my own than depending on the programs.

It was easy to put off disability insurance when I didn’t make much money, but my online income is slowly increasing (sign up on our email list to get the details in our monthly newsletter.) This is great, but now I have to consider income replacement again.

When is the right time to buy?

Most long term disability policies will replace about 60% of your income. However, if you pay the entire premium, then the benefit will be tax-free. That’s a nice benefit for self employed people like me. So here is a chance to apply that Algebra class we all loved. Can you still do algebra?

60% of X = $13,000

So X is $21,667 here. Taking taxes into account, I’d need to make around $25,000 to receive $13,000 in benefits. Anyway, I’m going to apply fuzzy math here and figure that I should make around $40,000 per year before long term disability insurance is worth it.

It’s also more difficult for self employed people to get long term disability coverage. It’s can be hard to verify the income of a self employed blogger so most insurance companies require at least 3 years of tax records. I have been 100% self employed for only one year so I’d probably need a couple more years under my belt first.

Conclusion – wait a bit

It looks like I need to ramp up the self employment income over the next two years to make long term disability insurance worth it. At this point, I’m not making enough money to justify purchasing a long term disability policy. It will also be much easier in 2 years when I have a more solid financial record to provide the insurance company. For now, I’ll just concentrate on completing my life insurance policy and put off disability insurance.

Do you have long term disability coverage? Employers who provide such coverage are getting fewer in number so you probably need to check your benefit. If your family is depending on your income, then you need to carefully consider disability insurance.

photo credit: jimbowen0306

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{ 3 comments… read them below or add one }

Petra September 2, 2013 at 7:05 am

Well… The question is still: do you NEED it? You have so much passive income, that I’m not sure you’ll need any disability income, no matter how much your website is making you. If you get disabled so that you can’t work anymore, then you will lose the extra income, but so what? You would all still be able to survive on passive income & your wife’s salary.

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retirebyforty September 3, 2013 at 9:14 am

We don’t make that much passive income. The rentals is still a lot of work. We’d probably have to sell it if I can’t deal with them anymore.

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Wilson September 3, 2013 at 1:43 pm

I’ll be honest – I haven’t really thought too much about buying long-term dib insurance. Maybe I should, as I suppose it’s roughly as likely I could get in an accident or come down with some sort of debilitating medical condition that could keep me from working as dying, and I do have life insurance (anybody know the stats by age group of dib vs. death? Macabre stuff I know). I guess I justify it by saying my savings are really a form of self-insurance, and if something awful happens then instead of retiring/ financial independence and removing myself from the rat race by choice, I’m instead in a position where I’m still not working, just that it’s not by choice, and thus my savings get used not for freedom but for necessary purposes. And by not purchasing a dib policy I direct the money I would put toward a premium toward savings, should I ever need it.

I seem to recall that when I did inquire a few years back about a policy the premiums were so shockingly high that I was willing to risk a long-term dib. The calculus for insuring for a short-term policy seemed that I was better served by saving and investing that money instead of buying more insurance. I’ve come to generally think that I may have been over-insuring for awhile and dumped my AFLAC policies in the past year too.

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