4 questions a financial planner asks clients to figure out how much disability insurance they need

• If you would not be able to reach your goals or be financially stable if you lost your income tomorrow, then it’s worth thinking about what kind of disability insurance coverage is right for you.
• In general, you want your disability insurance benefit to cover your expenses. In some cases, you might want the benefit to be large enough to provide money to put into savings as well.
• There’s not a single, objectively right answer for how much insurance you need (or how little insurance you can get away with). A lot of the conversation comes down to your preferences, risk tolerance, and how you look at your financial situation.
• As a financial planner, I ask clients how much money they need each month to maintain their lifestyle, what their current debts and liabilities look like, how their goals would be affected by a change in income, and how they feel about insurance in general.
• Policygenius can help you compare disability insurance policies to find the right coverage for you, at the right price »

No one likes to think about what would happen in the event of an emergency, disaster, or loss. But the reality is that things don’t always go according to plan. 

We can’t predict the future, but we can take some preventative measures so that we have financial options in many worst-case scenarios. Proper disability insurance coverage is one of those measures that just about anyone earning an income right now can consider taking.

Disability insurance allows you to protect your ability to earn an income, which you (obviously) need to fund your lifestyle today. But you also need your income to help you create a nest egg that will provide for you in the future, too — which makes disability insurance even more important.

If you would not be able to reach your goals or be financially stable if you lost your income tomorrow, then it’s worth thinking about what kind of coverage is right for you.

But how do you know what the right answer looks like when it comes to taking out a policy?

How much disability insurance do you need?

Everyone’s need for insurance policies depends on a number of variables. In general, you want your disability insurance benefit to cover your expenses. In some cases, you might want the benefit to be large enough to cover more than just your regular spending but to provide money to put into savings as well.

(Keep in mind that disability insurance generally replaces 60 to 70% of your income, not your full earnings.)

This is a good starting point, but as I point out to my financial planning clients, this is just a guideline. It’s not a hard rule that you must follow.

In fact, there’s not a single, objectively right answer for how much insurance you need (or how little insurance you can get away with). A lot of the conversation comes down to your preferences, risk tolerance, and how you look at your financial situation.

To dig through these nuances, we tend to ask our clients some questions to better understand how they feel about insurance, paying for this protection, and what it would mean to them to have a policy (as in, would it feel stressful to have another expense or would it provide relief to know they have some protection against the unexpected?)

These are the factors to consider to help you determine if you need more or less in coverage.

1. How much money do you need per month to maintain your average lifestyle?

Again, your policy should pay out enough in monthly benefits so you can afford all of your fixed, non-negotiable costs.

This is the baseline you want to work from — but you may want to consider additional healthcare costs, or how your lifestyle might change if you were no longer able to work.

2. What are your current debts or liabilities?

Do you currently have debts or other financial liabilities? How much? Your policy may need to be large enough so that the benefit from disability insurance would allow you to continue paying down balances without defaulting on existing loans.

3. How would your goals be affected by a change in income?

Another question we discuss with our financial planning clients is how much money they currently save per month toward their goals. We want to look at whether or not they’d want to keep funding those goals if they experienced a disability, or if they feel their needs and priorities would likely shift.

You might find that you’d want to stop putting money toward a certain goal if you were actually disabled, or you might feel confident that you want to keep funding what you’re currently working toward.

In that case, you can look into a policy that would provide enough of a benefit to stay on track toward existing goals that will require significant funding over time, like college savings for a loved one.

4. How do you feel about insurance in general?

This is a very subjective question, and your answer — even if you don’t love the idea of paying for a policy — may not change the reality of what you need to do.

If you or someone in your household relies on your income, getting some kind of disability insurance is likely the smart, responsible thing to do.

I’ll be honest with you: I’m not crazy about paying for insurance myself. But personally, my wife and I both have disability insurance even though we hope we never need to use it. The reason is because if we did experience a disability, our financial plan would likely implode since it relies on us earning income for at least another 10 to 15 years.

If our income dropped dramatically or disappeared entirely, we would likely struggle to meet our goals. Therefore, disability insurance is in place to protect us against that downside.

But we did still look at our options for reducing how much insurance we needed (and therefore, how much we have to pay in premiums). With our disability insurance, we opted for the longest elimination period available. We also elected for a shorter benefits period.

This way, we pay less in premiums, don’t feel over-insured, but we do still have some protection against a worst-case scenario that would otherwise break our financial plan — and at the end of the day, that’s what good insurance is designed to do. 

It’s supposed to protect you from the unexpected, and ensure you or your family have the financial means needed to recover.

Policygenius can help you compare disability insurance policies to find the right coverage for you, at the right price »

Eric Roberge, CFP, is the founder of Beyond Your Hammock. He helps professionals in their 30s do more with their money.

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