How to Determine your Long-Term Disability Insurance Need

Financial planning involves applying various stress scenarios to your current situation and evaluating how much of an impact it would have on your financial security.  One of the worst-case financial scenarios for you is becoming permanently disabled and unable to work in your chosen field, through accident or sickness, before reaching financial independence.

If you are already financially independent, your long-term disability insurance need is likely non-existent since you could presumably live off of your accumulated wealth even if you never worked another day in your life.

The further away you are from financial independence, however, the more catastrophic a long-term disability would be, and the higher your long-term disability insurance need is.

One method to arrive at a reasonable amount of long-term disability insurance coverage is to add up all of the things you would want the insurance to cover if you were to develop a long-term disability.

Many people want their long-term disability insurance to cover their essential expenses such as food, clothing, transportation, healthcare, housing, utilities, childcare, and insurance premiums.  You can review your credit card and bank statements to determine your average monthly expenses in each of the categories you want to cover.

Since healthcare expenses often increase after a long-term disability, you may wish to adjust this estimate upward compared to your pre-disability healthcare expenses.

You may also want your coverage to allow you to continue saving for your retirement.  In the scenario where you are permanently disabled in your 30's yet live to your 90's, not having enough monthly benefits to cover your essential expenses and save for retirement could be detrimental to your lifelong financial security, since your long-term disability insurance coverage usually ends around age 65 or 70 at the latest.

If you have other financial goals, such as college funding or legacy goals, these can be factored into your long-term disability insurance coverage as well.  If you would like to maintain discretionary expenses during your long-term disability, such as dining out or vacations, you may be able to have them covered, but at some point, the insurance company will cap your coverage.

If you are many years away from financial independence, you may want some form of inflation protection built into the monthly benefit payments as well, since the erosion of purchasing power due to inflation can be substantial over long horizons.

If you are married and not yet financially independent, you should consider the scenario of both you and your spouse developing long-term disabilities simultaneously and determine whether your current long-term disability insurance policies are adequate.

If you are a prospective client and would like to learn more about hiring us for a financial consultation, where, among other things, we would assess the adequacy of your long-term disability insurance coverage currently in place, please visit our Schedule Meeting page.



Mike McErlane, DO, MBA, CFP^®, CFA^®, RICP^®, EA, MCEP^®

Mike McErlane is the owner and founder of Comprehensive Financial Planning for Doctors, LLC based in Frisco, Texas.

Comprehensive Financial Planning for Doctors, LLC (CFPFD) is an Investment Adviser registered with the Texas State Securities Board.  Registration of an Investment Adviser does not imply any specific level of skill or training.  CFPFD only transacts business in states or jurisdictions in which it is registered or exempt from registration.  A copy of CFPFD's current disclosure brochure is available through the Securities and Exchange Commission's Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

The opinions and analyses described are subject to change at any time without notice.  Any information is considered general and is not intended to provide any specific advice or recommendations.  Your use of the information is at your sole risk.  You should consult with your financial advisor, attorney, tax advisor, insurance agent, or other professional advisor before taking action on any information or implementing any strategy.