Disability Insurance Needs

The 60–70% convention

Financial planners typically recommend replacing 60–70% of pre-disability gross income. Why not 100%? Two reasons: private disability policies almost never sell coverage above 60–70% of income (moral hazard — if you got paid the same disabled as working, the incentive to return to work weakens), and being disabled typically reduces work-related expenses (commuting, business clothes, work meals) so you need less than 100%.

Group LTD gotchas

If your employer pays the LTD premium, benefits are typically taxable to you. That 60% policy becomes ~42–48% net-of-tax. If you pay the premium yourself with after-tax dollars (or via a “gross-up” election), benefits are tax-free — effectively giving you the full stated coverage. This calculator applies a rough 30% tax haircut when you mark employer LTD as taxable.

Also watch for: caps (group policies commonly cap monthly benefit around $10–$15k regardless of income — a real problem for high earners), own-occupation vs. any-occupation definitions (own-occ pays if you can't do your job; any-occ requires you to be unable to do any job you're qualified for — much harder to collect on), and elimination periods (waiting period before benefits start, typically 90–180 days).

Supplementing group LTD

Individual disability insurance stacks on top of group coverage. It's typically own-occupation, non-cancellable, and portable (follows you between employers). Premiums are age- and health-underwritten — buy young if you can. Physicians and other high earners often need individual coverage to reach the 60% replacement figure given group caps.