Can you afford life insurance (term, whole, variable or universal) and disability insurance?

Financially squeezed families oftentimes cannot budget for both, yet each is key to a secure financial future. How should you allocate your limited insurance money for the greatest peace of mind?

If, despite your best efforts, you just can’t afford both policies, which should you sacrifice?

“It’s a very tough decision,” says Barry Katz, a fee-only Certified Financial Planner and president of Caratel Financial Services in Fort Lauderdale, Fla.

Chances of long-term disability by age 65
Source: Commissioners Individual Disability Tables, CSO/Society of Actuaries, the National Safety Council, and/or The Million Dollar Round Table.

Long-term disability defined as 90 days or longer.

“If you’re 40 years old, absent a family history of early death, statistically you are more likely to become disabled than you are to die,” Katz says. “And if someone passes relatively young — say, 37 to 40 — the surviving spouse, after a period of mourning, will adjust their lifestyle and get back to work or take a different job.

“Given that, I always allocate more dollars to disability insurance than to life insurance, within the confines of their financial goals, objective and how much money they have to spend.”

But Katz cautions cash-strapped consumers not to jettison any insurance policy capriciously.

“The problem with dropping life insurance or disability is there is the risk that you may not be able to get it again in the future,” Katz says.

Depending on your circumstances, these five tactics can help you decide how to allocate your limited insurance funds:

1. Spend less and meet your premiums. If you already have disability and life insurance, don’t cancel the policy if times get tough. Instead, cut back on discretionary spending such as dining out and vacations in order to keep both policies active.

It can be more costly in the long run to reapply for coverage later, and you would risk a worst-case scenario in the meantime. Remember: Your income may fluctuate, but your need to insure against these risks is unlikely to change.

2. Buy with an eye toward flexibility. If you have not yet purchased life insurance, you may make this tough choice easier in the future by purchasing several smaller term life policies rather than one large policy.

It will likely cost more in upfront fees, but should your income wane, you can drop a couple of the smaller policies and still have some coverage until you can afford to replace them.

“When you’re dealing with insurance, it’s very difficult to say, ‘I’m going to reduce my life insurance cost by $50 a month; just give me that much less,’ because you’ve contracted for a certain level of insurance at a certain premium,” Katz says.

“But if you have $200,000 in term life insurance that happens to be made up of four $50,000 policies, then you might drop one of those policies, whereas if you have a single $200,000 policy and you want to replace it with a $100,000 policy, you may have to reapply and requalify.”

3. Scale back your policy. You also can cut costs on a new disability policy by opting for a longer waiting period before benefits begin (industry average is currently 90 days) or choosing to receive benefits for a shorter period of time (such as five years) instead of insuring until you are 65.

The main benefit of this approach is that you’ll have some coverage you can afford now rather than having to go without. However, there is a downside — you may not be able to shorten the waiting period or lengthen the benefit period later should your financial circumstances change.

Find the best insurance rates
Bankrate can help you find the best available insurance rates.

Ask your insurance company about such issues before you decide on a policy, as some policies are more flexible than others.

4. Look for help from riders. Rather than choose between disability and life insurance, check first to see if either policy offers a rider — an addendum that insurers use to expand your coverage — usually for an additional fee.

“The best bet would be a life insurance policy with a disability rider or a disability policy with a life insurance component,” Katz says. “You may be able to do a balancing act where the premium would be less but you do still have both disability and life.”

Also, be sure to check with your home insurer to see if it offers a disability rider with your homeowner’s policy.

You’re not likely to get the same coverage or terms with a rider as you would with a stand-alone term life or disability policy, but it may be a cost-effective alternative to dropping one over the other.

5. Don’t overbuy. It may be tempting to buy a lot of coverage — but it also may be a mistake.

“People think they need a lot more life insurance than they do because they are using (insurance company) calculators that are geared to oversell,” says Laurence Kotlikoff, a William Fairfield Warren professor of economics at Boston University who developed the ESPlanner financial planning software.

“Saying that you need 78 (percent) to 85 (percent) or even 100 percent income replacement is completely nuts.”