In case you’re injured or stricken by a serious illness, your income may be curtailed while your expenses continue. To cover that risk, disability income (DI) insurance is widely recommended by financial advisors.
You should have disability coverage of 60 percent of your income. For example, if you earn $5,000 per month, your disability insurance will pay you up to $3,000 per month. If you have a smaller amount of group disability coverage, you should supplement it with enough individual insurance to bring you up to 60 percent.
Disability insurance policies can provide benefits for as long as you live but such coverage is expensive. You can save money by buying coverage until age 65, when you’ll probably be retired and lost income won’t be a factor. At the same time, your disability policy should have a feature that will continue to fund a retirement plan, if you are disabled. That makes it more likely you will have a sufficient retirement fund when disability payments stop, at age 65.
If possible, pay the disability insurance premiums with your own money. If you do, and you become disabled, any benefits you receive will be tax-free rather than taxable income.