In order to accurately assess how much income insurance coverage you will need, we recommend calculating an estimate of what your monthly expenses are. This includes but is not limited to: your living and recurring expenses, mortgage payments (if any), dependent expenses, lifestyle expenses, and other daily essential expenses. Also, consider your current income and how much emergency savings you already have. Once you have all this information, estimate what benefit amount you will need that will help you sustain your obligations and necessities.
The simplest answer to “How much should I get?” might be “Enough to replace all my income.” However, when it comes to disability insurance, that answer doesn’t work: you aren’t likely to find such a policy. Almost all policies are designed to replace a portion of your income, ranging from 40% to 80%, depending on several factors. Remember: Long term disability coverage is meant to last a long time, providing a monthly benefit that could last for decades. That kind of coverage comes at a cost. The lower the monthly benefit you can comfortably live with, the easier it will be to pay premiums while you are healthy and working.
Here’s one way to decide what you need:
- What are your actual current expenses?
If you’re concerned about maintaining your lifestyle, you need to start by thinking about all the expenses that go into that. Try this: look at your monthly take-home pay, then figure out how much you have leftover (if any) at the end of the month. If you take home $5,000 a month, save $800, and give another $200 to charity, then your actual expenses are more like $4,000.
- What spending changes will you make if disabled? Can your spouse provide more income? Will the benefit be taxable? What other assets, income, or savings can you draw on?
- So, try to put a number on all of the items discussed above and enter them into this simple formula:
Your total current monthly expenses
minus (Reduced spending each month)
minus (Monthly income from other sources)
equals (Minimum monthly disability benefit)