If you have someone depending on your income, life and long term disability insurance are a must. 

Long Term Disability Insurance

If you don’t already have long term disability insurance through your employer, you should look into buying coverage. Statistics show you are more likely to become disabled during your working career than to die early. And disability insurance is designed to replace your income if you’re unable to work for an extended period.

Disability insurance not only provides some peace of mind for anyone who relies on your income, but it also allows you to leave your emergency fund and long term investments untouched if you were unable to work for a period of time.

You may have the option to pay the premium yourself versus having your employer cover the cost of the insurance. It might seem like an additional benefit to have your employer pay, but if you pay the premiums instead, any benefit you receive will be tax free.

Life Insurance

Term or Permanent?

Term life insurance is typically sufficient for most families. This allows you to pay for coverage only when you need it most – while you have kids living at home and before you have saved enough to no longer be reliant on your income.

Permanent life insurance is significantly more expensive than term insurance. So make sure you have good reason for it before jumping in.

Having a child with disabilities who will need support even after you pass away could be a good reason for going this route. And for some families that will face significant estate tax bills, permanent insurance can be a useful planning tool.

Be sure to think about what your true need is, and when that need ends (if at all) before making this decision.

How Much Do You Need?

To determine how much coverage you need, first think about whether your current income is covering your living expenses and your savings toward your long term goals. If yes, multiply your yearly take home pay (there is no need to use gross pay because life insurance proceeds are not taxable) by the number of years you have until retirement. This will give you a rough idea of how much coverage you may want.

You can think about laddering life insurance policies, which means instead of buying one 30 year term policy, you might buy three policies with 10 year, 20 year, and 30 year terms. Each policy would be ⅓ of the total value you want to insure.  

This will save money on the premiums you pay (since a 10 year policy is cheaper than a 30 year policy). And it will also reduce the amount of insurance you have over time as you build up your savings and become less reliant on your income.

Final Thoughts

Life insurance and long term disability insurance are safety nets for those who depend on your income. No one likes to think about needing them, but they’re critical tools for ensuring your family is financially secure even if you’re not able to support them.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

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Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.