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How Much?
Dave recommends an amount equal to 60 to 70% of your monthly income as a starting point. This can be reduced based on your progress with eliminating debt and growing your savings, which will decrease the overall cost, as well.
Elimination Period
This is the number of consecutive days that you must be totally disabled before the monthly benefit amount becomes payable. Dave recommends taking the longest elimination period your budget and emergency fund can afford.
Benefit Period
Dave recommends at least a five-year benefit period for disability insurance, but prefers the to-age-65 benefit period if it is within your budget. Because 85% of disabilities are resolved within five years, that is the shortest term that he feels is appropriate.
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Disability insurance provides regular income even if you're unable to work at your job (or another job). Should an injury or illness cause you to miss work for a specified period of time, the insurance company may begin making weekly or biweekly payments to you. These will last for the duration of your disability, or the maximum limit of the policy.
The benefits you receive from a disability policy can be used for any purpose, including monthly expenses, expensive projects, or savings.
Who Needs Disability Insurance?
If you work outside the home, you should consider purchasing a disability insurance policy. A surprising number of workers are expected to be unable to work for a prolonged period:
- 25% of 20-year-old workers will likely experience a disability lasting 1+ years before they retire
- Each year around 5% of all-age workers will experience a disability lasting six months or less
Additionally, only a small number of adults have 3 months' worth of savings in case they become disabled.
Dave Ramsey agrees with the need for disability insurance, at least for long-term disability insurance (see below).
What’s the Difference Between Short-Term and Long-Term Disability Insurance?
The difference between short-term and long-term disability insurance lies in how long disabilities are covered:
- Short-term disability normally beings making payments soon after you become disabled, but only pays for a defined period of time. Some policies cover only a few weeks or months of lost income.
- Long-term disability begins making payments after a longer waiting period, which can be months or longer (as much as a year). Long-term policies normally pay benefits for years or indefinitely.
Dave Ramsey doesn't recommend short-term disability insurance, because a few weeks or months of lost income should be covered by your 3-6 month emergency fund. If you don't have a fund, he suggests putting what you'd pay in premiums toward your savings.
Dave does recommend long-term disability insurance, as it's not really feasible to save up for years of lost income.
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