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Ask Dave

How Much Should I Have?

Lance asks Dave a question about one of the most under-insured areas most Americans have today.

QUESTION: Lance asks Dave if he should have long-term disability insurance. How much should he have relative to his income?

ANSWER: Yes, you definitely need it. Disability insurance is probably the most under-insured area of the average American. A lot of people know they need life insurance, but not enough get disability insurance. If you’re 32 years old, you are 12 times more likely to become disabled than to die before age 65. You need long-term insurance, but don’t do short-term. When you’re out of debt and have a full emergency fund, you won’t need short-term insurance.

There are a couple of things to remember about long-term insurance. A lot of work place group plans offer plans that replace 50% to 70% of your income with caps on the amount for when you make a huge salary. And 70% is enough, since that’s about how much you take home anyway after taxes. Disability insurance isn’t taxable if you buy it with after-tax income. If you can get it through work, that’s usually the cheapest way to get it.

Also, you want to look for own-oc, which means your own occupation is covered if you become unable to do your job. If I lost my voice, I couldn’t do my radio show and would get insurance money for that, but I could do something else. Usually, that own-oc has a 2-year limit on it.