Life Insurance and Short Term Disability Recap – How we saved $1,500 a year!

So, I wrote a couple of posts on making sure you have the right amount of life insurance and if you really need short term disability.  You can find them here:

• Do You Need Short Term Disability Insurance?
• Ensure You’re Not Over Insured
• How Much Life Insurance Do You Need?

I wanted to write a quick recap post to talk about how my wife and I just got all of this straight and ended up saving ourselves about ~$1,500 a year.  Read on to find the details!

 Money Saving Breakdown – Life Insurance and Short Term Disability Insurance – Recap

• Difficulty (Super Easy/Easy/Medium/Hard/Expert): Hard
• Average Savings per Year ($/year): 1,467
• Time Required (mins): 120
• Savings for your time ($/hr): 734

The Insurance Savings Details

So, it was kinda a pain in the ass to go through running all of the calculations to determine how much life insurance my wife and I actually.  Also, sitting on the phone with the benefits folks isn’t exactly my idea of a stimulating conversation.  That’s why I rated this money saving idea as “hard”.  But after about two hours of work, I think we have all of our life and short term disability insurance straight!

Here’s the savings breakdown:

• I reduced my life insurance from $600K to $300K.  This saves $155.88 / year.
• I had $200K of spouse life insurance.  I am increasing this to $250K as my wife’s work covers her for free for $50K ($250K+$50K = $300K – my magic number).  This will cost an extra $18.60 / year.
• I cut accidental death insurance I had for spouse & kids.  This was $250K spouse, $50K child.  This saves $100.80 / year.
• My wife had additional $350K life insurance through her work.  We cut this and saved $403.20 / year.
• My wife ditched her Short Term Disability.  This saves $826.02 / year.

 Grand Total Saved per Year = $1,467.30

My Wife Was Crazy Over-Insured

Now, we’re both insured for $300K, we have no life insurance for our kids (no need), and my wife has no short term disability (not planning on having any more rugrats).  We feel that this is the proper amount of insurance for us.

One crazy thing is that before we made these changes my wife was INSANELY over-insured for life insurance.  Let’s look at the payout if she died in an accident:

• $50K life insurance provided free from her company.
• $50K accidental life insurance provided free from her company.
• $350K life insurance my wife was paying for through her company.
• $350K accidental life insurance my wife was paying for through her company.
• $200K life insurance I was paying for through my company.
• $250K accidental life insurance I was paying for through my company.
• TOTAL = $1,250,000!!!!  Holy Crap Batman!!!

I’m glad we reduced her life insurance coverage just to keep me honest  Accidents are happening more and more these days…

Final Thoughts

So, what is the morale of the story here?  Take the time to make sure you are properly insured.  In our specific case, we were WAY over insured because we never took the time to think through how much we’d actually need if something were to happen.  We just always assumed that more insurance was better.  As a result, we’ve wasted tens of thousands of dollars over the years in insurance that was overkill.

Please – if you haven’t taken the time to look at how much you’re spending on insurance do yourself a favor and check!  You could be in for a big surprise!  “Right-size” your life insurance and short term disability insurance today!

Bonus Pro-Tip

Normally you aren’t allowed to change your benefit elections during the middle of the year unless you have a “qualifying life event”.  You’d have to wait until the benefit election period in the fall.  I’ve heard that you can get around this by telling the benefit folks that your spouse just recently changed jobs.  They don’t really have a way to check this I guess…  If you’re running into this issue, give it a try – it may work for you!

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Do you need short term disability insurance, or is it better to take your chances?

Is it worth it to pay for short term disability insurance?  Or, would you rather risk going without it to save some money each year?

Join me as I dissect the pros and cons of short term disability insurance.  We’ll try to uncover some of the mystery surrounding it.

You may even find a way you could save $500 – $800 a year!

 Money Saving Breakdown – Do You Need Short Term Disability Insurance?

• Difficulty (Super Easy/Easy/Medium/Hard/Expert): Medium
• Average Savings per Year ($/year): 832
• Time Required (mins): 15
  
• Savings for your time ($/hr): 3,328

What is Short Term Disability Insurance?

Short terms disability insurance is a type of insurance that you can buy to protect your income if you become injured or sick.  This will typically pay a percentage of your income for a set number of weeks if you get injured.  This would be above and beyond any type of worker’s compensation, insurance payments if injured in an auto accident, etc.

Who Needs Short Term Disability Insurance?

Who wouldn’t want to get paid if they accidentally get injured?  I’m sure all of us would – there is only one small catch.  Unless you’re one of the lucky ones that has their company provide short term disability insurance, you’ll have to pay for this insurance out of your own pocket!

So, what types of people should ensure they obtain short term disability insurance?  Interestingly, the same people who need life insurance generally need disability insurance, and for the same reasons – to support their financial dependents.  I would recommend you consider short term disability insurance if you fall into one of these categories.  These are:

• Women planning to become pregnant
• People that participate in high risk extracurricular activities.  Examples include outdoor sports, hang gliding, extreme weight-lifting, etc.
• People without a 6-month emergency fund
• People that are already covered with short term disability insurance with a known health issue (could cause missed work for weeks at a time)
• People who travel a lot (long commutes, high amount of work related, etc.)

When doing research on this topic, it’s hard to find straight answers.  This is because almost all of the search results in Google are populated by actual insurance companies!  And they are all trying to sell you a policy!  Hopefully we can take a methodical approach to reason our way through sea of information!

I have a feeling that all of the stats thrown around about the high number of “injuries” are including all those people who normally get pregnant in their lifetime.

Short Term Disability Insurance – Typical Injuries

I found this list of typical short term disability injuries here.  I would guess that most back injuries are from car accidents or home-improvements gone wrong…

• Pregnancy (normal) – 21%
• Injuries (excluding back) – 10%
• Digestive/Intestinal diseases – 7%
• Back injuries – 6%

This seems to validate the pregnancy “injury” that insurance companies are throwing around.  This was an “aha” moment for me because this is the main reason we sought this type of insurance in the first place!

Short Term Disability Insurance – A Simple Calculation

If you don’t fall into one of the categories above, you may want to consider dropping short term disability insurance.  You should weigh the trade-off in how much it’ll cost you vs the risk.  Read on to see how you can calculate your break even injury frequency.

Example To Find Your Break Even Injury Frequency:

In this example we’ll assume:

• a weekly salary of $1,500
• short term disability insurance covers 60% of your salary
• injured/out for 9 weeks total (1 week unpaid plus 8 weeks paid)
• 25% taxes on the payment

1. Your weekly take home pay would then be $1,500 * 60% * 75% = $675
2. Your total payout for the injury would then be $675 * 8 weeks = $5,400
3. Now, find your annual cost of the short term disability insurance.  Let’s assume the cost is  ~$32 every two weeks.  This is $832 annually.
4. Take the $5,400 payout you calculated in step #2 and divide by the $832 cost calculated in step #3.  This will give you the break even number of years you can sustain a serious injury and be out of work for 9 weeks.  $5,400 / $832 = 6.5 Years

Obviously there are a lot of assumptions here.  As long as one doesn’t get seriously sick, pregnant, or injured every 6.5 years it would be better to NOT have the short term disability insurance.  This is because you would save money in the long run by just taking the money and investing it or putting it into an emergency fund.

Short Term Disability Insurance for the Self Employed

Many companies will offer their employees short term disability insurance for free or for a fee payable by the employee.  If you would like to start your own company, then you will have to get short term disability insurance through a private company if you think you should be covered.  If you do own your own company and work from home, there is a below average chance you will get injured all things considered.  For instance, it’s pretty hard to break your leg while you try to run a successful money making blog from home :-).

If you are self employed and run a business where you are out and about during the day (think lawn care, construction, home repair, etc.), then it may be a good idea to consider short term disability insurance for yourself.  A person can still blog from home with a broken leg, but it would probably be pretty difficult to cut lawns with a cast on!

Final Thoughts

I’m lucky in that my company fully covers short term disability insurance for me.  For my wife, we decided years back to obtain short term disability insurance.  This was because we were trying to get pregnant.  After we’ve had kids, we haven’t taken the time to reassess if she actually still needs this type of short term insurance.

Because we don’t plan to have any more kids, I’m not so sure we need it.  We’re not involved in high risk extracurricular activities.  We have a good emergency fund saved up.  We’re both relatively healthy.  And, we don’t travel a lot much.

If the worst were to happen, we’d have to dip into our emergency fund without short term disability insurance.  As an aside, we’ve talked about trying to eventually downsize our house and have her go part-time.  Without the daycare costs and lower living expenses, this would make the need for this type of insurance even lower.

I don’t think she’ll get seriously injured or sick more than every 6.5 years, and the potential $800+ in annual savings sounds great.  It seems like a reasonable risk for us to get rid of this insurance and save the money.  We need to think through it a bit more, but I think we’ll end up dropping this insurance (during open enrollment in the Fall).

What about you?  In the end, it all comes down to your own personal risk vs reward trade off.  Do you carry short term disability insurance or have you decided that the risk vs reward trade off isn’t worth it to you?

One last item I feel needs mentioning – it can be important to have health insurance if something does go wrong so you can at least cover the bills if you’re out of work.

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