FIRE, or “Financial Independence, Retire Early,” is about keeping your expenses low and saving, but that doesn’t mean you should skip out on disability insurance.
A long-term disability insurance policy replaces your income if you can’t work because of an injury or illness. If you’re in an accident or get sick and suddenly can’t work, you risk burning through your FIRE savings without disability insurance.
What is FIRE?
FIRE, which stands for Financial Independence, Retire Early, is a personal finance movement that became popular on blogs and internet forums like Reddit during the 2010s.
The goal of FIRE is to save enough to retire as early as possible. That means cutting down your spending and saving as much as half of your income — or more.
What disability insurance has to do with FIRE
Even though getting disability insurance means higher spending, it can help keep you on the path to early retirement.
If you can’t work because of an injury or illness and you have disability insurance, you don’t have to rely on your savings to cover your expenses. Your disability insurance benefit matches your income so you can pay for your expenses and continue to add to your savings.
Without disability insurance, you might have to use up your savings to pay for everything from your healthcare, rent or mortgage, utilities, gas, car payment, and groceries.
How much disability insurance do you need for FIRE?
If you’re a follower of FIRE, you need enough disability insurance to replace your income and cover your expenses.
You should ask yourself how long you have until you reach your retirement goal. Choose a benefit period (meaning how long your benefits last) that’s at least as long as you need to meet your goal.
As you save more, you may be able to reduce your disability coverage to lower your premiums. But you usually can’t get more disability insurance without going back through the underwriting process and raising your rates.
What kind of disability insurance do you need?
It’s worth having your own long-term disability insurance policy if you’re trying to retire early (instead of a short-term policy).
Short-term disability insurance costs the same as a long-term policy (both cost about 1% to 3% of your income), but short-term insurance only pays benefits for up to a year or less.
Do you need group insurance for FIRE?
If it’s an option, you should opt in to your employer-sponsored disability coverage since it’s usually free or discounted, but you shouldn’t rely only on your group disability insurance alone.
Your employer, not you, has control over a group plan’s coverage and benefit period, so your coverage might not line up with your needs. Plus, any benefits from your work plan are taxable, which leaves with a lower benefit amount.
Disability insurance riders for FIRE
A rider is an addition to your disability insurance that changes your coverage. Riders can be optional or free. If you choose to add a rider to your disability insurance, it may make your policy more expensive.
Some common disability insurance riders that might be useful for FIRE are:
Guaranteed non-cancelable rider: Locks in your rates and keeps your insurance provider from canceling your coverage for as long as you keep paying your premiums on time.
Future purchase rider: Allows you to increase your coverage without reapplying and going through underwriting (and raising your rates).
Own-occupation coverage rider: Lets you continue receiving benefits even if you can work another role, as long as you can’t do the specific job you trained for.
Residual disability coverage rider: Pays out partial benefits when your disability affects part of your income.
How to lower your disability insurance rates
There are a few ways that you can lower your disability insurance rates, or at least make sure you’re getting affordable coverage:
Lower the benefit period: You can lower your benefit period as you get closer to retirement, but it’s important to consider whether a lower rate is worth losing benefits.
Increase your waiting period: A longer waiting period, or the time after your disability that you have to wait for benefits, is 90 days, is cheaper, but it means relying on your savings for longer when you’re out of work.
Compare disability insurance quotes: The best way to find affordable disability insurance is by comparing quotes from multiple companies based on your coverage needs.
Canceling disability insurance on FIRE
It might be a good idea to think twice about dropping your disability insurance after you retire early.
You won’t be able to make a claim unless you earn an income in the future. If you decide to work again later on, it’s better to keep your disability insurance policy active at the same rate than to get an entirely new policy.
Frequently asked questions
Who needs disability insurance the most?
It’s worth having disability insurance if you have a high-paying, highly specialized job. Doctors, surgeons, dentists, and lawyers all stand to gain the most from having a strong disability insurance policy.
How long does disability insurance last?
You can receive disability insurance benefits with a long-term policy for as little as two years, but it’s more common to get coverage for five or 10 years, or even up through retirement age.
Can you still keep your expenses down with disability insurance?
Yes, it’s possible to keep your spending low with disability insurance. You can get cheaper disability insurance premiums by lowering your benefit period, making your waiting period longer, and by comparing quotes from more than one disability insurance company before buying a policy.
