I listed purchasing a disability/personal accident insurance cover (for both D and myself) as one of my personal finance goals for 2011. I thought I had my thinking done with but the comments to that post got me thinking deeper. Primarily, the two questions to be answered now were:
- Do we really need disability insurance cover?
- If yes, how much?
A few basic thoughts to begin with:
Why do you need disability insurance?
Youâ€™d need disability insurance to help meet your monthly expenses since your ability to earn a regular income could be hampered were you to become partially/totally disabled.
When do you need disability insurance?
Youâ€™d need disability insurance when you become partially/totally disabled and your income (from whatever sources) isnâ€™t adequate enough to meet your monthly expenses.
Now, how much disability insurance cover do you need?
I came up with a simple mathematical model â€“ you can download the spreadsheet template here.
Note: The amounts shown are arbitrary in nature.
I ran the numbers on our situation and have come to the following conclusions:
- Given our lifestyle, we certainly do face the risk of a disability-inducing event occurring.
- We do need a fair amount of disability insurance (somewhere in the low seven-figures) since our passive sources of income arenâ€™t yet adequate to meet the estimated monthly expenses.
- Since both D and I work, Iâ€™ll buy a policy only in one of our names â€“ this would cover us even in the worst scenario. But I plan to defer this purchase for some more time in order to let these thoughts percolate through my mind.
It’s seriously tough to think and plan ahead for such morbid situations.
What do you think of this approach?