Calculating Your Disability Insurance Needs
This can seem fairly simple to most people. Simple look at how much you make right now in take-home income and then figure you need at least 75% of that.
While that may be true for some, it’s not always so easily quantified. How much will you really need in order to maintain your standard of living and keep your obligations?
Let’s look at a simple worksheet that will help you make that determination more concrete. This is an extremely important life decision, so it should not be taken lightly or without qualified advice.
Incomes
First, determine what your income from your current policy coverage would be. If it’s 60% of your salary and is non-taxable, then you’ll need to look at your pay stub, find your salary before taxes were deducted and use 60% of that number.
Income from any other disability coverages such as a supplemental policy or a secondary benefactor such as the Veteran’s Administration.
Other income sources such as your spouse, interest on accounts, investments, and so forth.
These incomes should all to totaled to give you an estimate of your total monthly income while disabled. For most people, this should total about 75% of your current, working monthly income. If not, consider extra coverage.
To be sure that your disability income is high enough to pay your expenses, it’s a good idea to consider what those expenses are. This is like most monthly budgets and should include all of your “hard” expenses—the ones you can’t do without.
Mortgage, insurances (health, life, homeowners, cars), car payments, utilities, food, child care, and so forth. If your disability income will not meet these expenses, you definitely need supplemental or better coverage.
Your total income while disabled should equal an amount as close to your current take-home income as possible. If your after-tax income is too much higher than your disability income, you will likely find yourself in a financial mess if you are ever forced onto disability.
Finally, you should also consider the grace period and how that will effect your income. If your disability insurance’s grace period is 120 days and you typically only have 2 weeks of sick leave and another week or two of vacation, what will you live on during the interim? You should have a special savings account to cover that 2-3 months of no income.