Disability Insurance Articles

Deciding On An Amount Of Disability Insurance Coverage

2010-11-28

Disability insurance coverage replaces your income if you become unable to work. When purchasing a policy you must decide what disability insurance amounts you want to pay for. Of course the more coverage you buy the higher the premiums will be.

It is generally recommended that you get enough disability insurance coverage to replace 60% to 70% of your current salary, before taxes. If your employer is providing a plan then the benefits may be taxable. This recommended amount may be correct for many consumers. But if you want to factor in all of the variables for a more accurate estimate then the calculations are a little more complex.

First make a list of your actual monthly expenses. Take into account how these expenses might change if you are unemployed. Find out if your policy has a waiver of monthly insurance payments while you are disabled. You car insurance and auto fuel expenses might go down if you are not driving to work. Your medical expenses might go up. Your utility bills might be slightly more if you are at home all day. You should also consider what additional expenses you might have in the future. Are you thinking of buying a new car while the one you have now is paid for? Will you have college expenses for a child? Be sure to average out any quarterly or annual payments such as taxes or insurance. Total your expected monthly expenses.

Now write down the income that you would expect to have. Do you have interest or dividends from investments, or rental property income? Add in your spouse's income. Estimate the amount of disability you might get from Social Security, although getting approved for these benefits can be a long process so it's best not to count on receiving them right away. Add up your expected total monthly income.

Subtract your expected monthly expenses from your expected monthly income. This is the amount you need to come up with every month if you can't work. If you have savings then you might decide that you would pay part of those expenses out of savings. Whatever the shortfall after these calculations is the disability insurance benefit you need.

Disability insurance amounts are one factor in determining the premiums that you will pay for your coverage. If you get a quote for the amount you decided upon and it is too high then take another look at your expenses and see if you can make adjustments. Perhaps you would have to sell one car if you became disabled or you would have to take more out of savings. Find the right balance for your present and future financial stability.