Disability Insurance and (declining) Income

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wassabi
Posts: 353
Joined: Sun Feb 02, 2014 8:06 am

Disability Insurance and (declining) Income

Post by wassabi » Mon Jun 19, 2017 3:55 am

I'm considering disability insurance but my job situation is likely changing in the next six months. Right now I make around $130k but expect that my salary will drop significantly in my next job (possibly to $85k). There are several reasons but it primarily comes down to a quality of life change and taking a job I will love (current job is a dead end).

My understanding of DI is that the rate is based on the level of income one would need to replace. I have a substantial savings, no debt, and a spouse (no children) who can work full-time.

For these reasons, does it make more sense to wait to get DI until I'm in a lower paying job so that I'm replacing a smaller portion of income and thus have an overall lower rate? I shopped around a few years ago and the rate at my current income was somewhere around $300/month. I can afford that now but if/when I take a lower paying job that amount will be too high relative to my new monthly income. Additionally, with no debt and a substantial savings I am willing to take a lower payout (if disabled) for a lower monthly rate.

Am I thinking about this correctly? Can anyone provide advice on a recommended path forward?

Thanks!

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gasdoc
Posts: 1209
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Re: Disability Insurance and (declining) Income

Post by gasdoc » Mon Jun 19, 2017 9:50 am

I have never heard of anyone being asked to reduce their level of DI because their salary decreased. On the other hand, you are limited to something like 0.6 of your current salary as the payout. I would go ahead and get a policy now- there is nothing stopping you from taking out a smaller amount than the maximum. Also, plan to pay for the insurance "after-tax," so that you don't have to pay tax on the payout if it were to occur. There is no point in paying for an income stream that is shared with the government.

gasdoc

BruDude
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Location: Las Vegas

Re: Disability Insurance and (declining) Income

Post by BruDude » Mon Jun 19, 2017 9:58 am

gasdoc wrote:I have never heard of anyone being asked to reduce their level of DI because their salary decreased. On the other hand, you are limited to something like 0.6 of your current salary as the payout. I would go ahead and get a policy now- there is nothing stopping you from taking out a smaller amount than the maximum. Also, plan to pay for the insurance "after-tax," so that you don't have to pay tax on the payout if it were to occur. There is no point in paying for an income stream that is shared with the government.

gasdoc
x2, get the policy now, you can always reduce the coverage amount later if your income drops and you don't want/need the full amount. Every DI application will ask if you are planning on changing employment in the next 6 months. If the answer is "yes" and you have an offer on the table already at the reduced salary, the insurance company will likely only offer based on the amount of the new salary if there is a reasonable expectation that you will take the job.

wassabi
Posts: 353
Joined: Sun Feb 02, 2014 8:06 am

Re: Disability Insurance and (declining) Income

Post by wassabi » Tue Jun 20, 2017 4:16 am

I didn't know I could reduce the coverage amount after I had locked in coverage. Thanks for the replies!

BruDude
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Location: Las Vegas

Re: Disability Insurance and (declining) Income

Post by BruDude » Tue Jun 20, 2017 11:26 am

wassabi wrote:I didn't know I could reduce the coverage amount after I had locked in coverage. Thanks for the replies!
You can always reduce your benefits, but you can only increase them by re-applying or using the future increase option rider.

John Laurens
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Re: Disability Insurance and (declining) Income

Post by John Laurens » Tue Jun 20, 2017 1:54 pm

You mention that your spouse can work full time and there are no children. Depending any new info you can provide, your age, net worth, her potential income, her willingness to go back to work, your health/occupation/hobbies, potential to have children, etc would determine if you even NEED LT DI.

I need it for 10 more years for sure. After that I will reevaluate whether I need to transfer risk to DI.

Regards,
John

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