How Much Disability Insurance Do I Need?

Disability insurance is an important element in protecting your financial well-being. This insurance offers income replacement if you get hurt or can no longer work because of physical limitations. So once you know you need it, you might start asking, how much disability insurance do I need? Learn the many methods for calculating disability insurance so you can protect yourself and your family financially.

Understanding Disability Insurance

Disability insurance is a type of income replacement insurance. You’ll receive coverage if you are too sick or injured to complete your normal job responsibilities. The benefits help you maintain your lifestyle and protect large investments like your home or car by helping you to continue making payments even while you’re away from work.

Many people avoid the expense of disability insurance premiums because they think they are unlikely to become disabled. And while it isn’t common, 1 in 4 people suffer a disability during their working years. For some, it’s a short blip where they can’t work for six weeks while their broken arm heals. But 13% of all those who experience a disability have one that lasts five years or longer.

Even if you work in an office setting, disability insurance can be a smart move. While you’re less likely to experience serious injuries than those who work in construction or the trades, your work would still be disrupted by something as small as a broken bone or debilitating illness. 

Despite being someone who is careful and unlikely to suffer serious injury, disability insurance is wise because 90% of claims are from someone who suffers an illness, including cancer, stroke or severe arthritis that prevents them from their normal work.

How much insurance you need varies based on your expenses, whether someone else in your household is bringing in income, your savings and more.

How to Calculate the Right Amount of Disability Insurance You Need

You can find how much disability coverage you need using a simple formula that includes just a few steps. Most people choose to cover a portion of their income that is equal to 40-80%. But here’s how to see where you fall in that range.

Sum Up Your Monthly Expenses

To ensure you’ll be able to maintain your lifestyle, you’ll need to know what your expenses look like. Ensure you’ll have adequate coverage to at least cover essentials. 

As you look at your expenses, include the following.

• Mortgage/rent
• Car payments
• Loan payments (including credit card bills and student loans)
• Food for groceries
• Utilities

Your spending habits will likely change if you’re disabled. For example, you won’t spend money on commuting, so your gas bill will go down. You also won’t be paying taxes out of your income so you don’t need to completely replace your income. Spending on lunch and coffee breaks might also decrease.

But you might also have some increases, such as help getting to and from medical appointments unless you have a family member who could help. So you might want to be a little more generous with how much you put in your transportation budget.

Sum Up the Total Earnings You Expect to Continue Receiving 

Next, you need to review your income streams and see what payments you’ll still receive. For example, can you pull from your retirement early if you’re disabled to help you live? Or do you have a side hustle that will continue operating even though you need to step away? Maybe you have rental property income that will continue if you pay someone to maintain the property.

Another source of income for some people is investment income. If you have investments that regularly earn you interest and dividends, you can include that in the estimated income that will continue even if you are disabled.

Subtract the Second Figure From the First Figure

Now look at how much income you’ll have and subtract your expenses. Review how much additional income you’ll need to cover necessary expenses and maintain your lifestyle for your family. That’s the amount of long-term disability insurance you’ll need.

You should increase that final number by about 10% or so though to account for inflation or growing expenses. That’s because this coverage could last for many years while you recover from an ailment or injury. However, you’ll also be balancing premium expenses with the benefits. So if you can’t afford to increase the benefit, get the most coverage you can afford. 

If you have $5,000 in expenses and anticipate still having $3,000 in income, you might want to get $2,000 per month in disability insurance, or 40% of your income, if you make $60,000 per year. Or if you can afford it, get 50% to cover inflation over the course of your disability. 

Other Factors to Consider

Before you purchase a disability insurance policy, consider these additional factors that will influence which policy you go with and how much coverage you select.

Short-Term or Long-Term Disability Insurance 

There are two types of disability insurance: short-term and long-term. Short-term policies generally cover you for 3-6 months. Long-term policies often have benefit terms of 5, 10 or 20 years or until you can retire. 

Short-term disability plans often allow you to cover more of your income, up to 70%. Long-term plans generally offer 40-70% of your income but last for longer benefit periods. 

Benefit Period 

The benefit period on disability insurance is the time that the policy will pay benefits for a continuous disability. Some policies are a set number of years while others are based on your retirement age. If you have a policy with a set timeline, you can shorten it as you get closer to retirement age to make the policy more affordable while still getting the coverage that you need.

Waiting Period

Policies include something called a waiting period. The most common is seven days, but you should read your policy language to ensure you know what your policy coverage is. Some policies have much longer waiting periods of up to 90 days. This will impact how long you go without income, which will be a factor in how far your savings go during that time.

Steps to Take When You Need More Disability Insurance

After learning more about how to calculate disability insurance needs, you might discover that you need additional coverage to help protect you. Here’s what you can do to ensure you have adequate insurance protection.

Check Current Policy if You Can Increase Coverage

You might be able to increase your existing policy. Consult your policy language to see if you can increase the percentage of your salary replacement in your existing policy.

Purchase Additional Coverage Through a Supplemental Policy

If you can’t increase your policy directly, you can get a supplemental policy to replace additional income. In this case, you’d receive payouts from multiple disability policies in case of an illness or injury that prevents you from working.

Add a Rider That Allows for Potential Increases in the Future

Riders can help you increase your coverage and benefits while also tailoring the policy to your unique needs. Adding a cost-of-living rider or future purchase option can help protect your insurability while increasing your benefits so you have the income replacement you need.

How to Estimate the Cost of Disability Insurance

Like most insurance products, disability insurance costs are based on a complex algorithm that evaluates many aspects of your life and history. Here’s a look at some of the factors that companies use to calculate premium costs.

• Income and occupation: The higher your income, the more expensive the coverage will be because the insurance company is committing to paying out higher benefits in case you are disabled. Additionally, your occupation will impact your premiums because riskier professions are more commonly associated with disability.
• Benefit period: The longer the insurance company will potentially pay out on the benefits, the costlier your policy will be. So a policy with a 5-year benefit period will cost less than one with a 10-year benefit period.
• Medical history: Your overall health and medical history will impact how much you pay for coverage. If you have a history of conditions or health issues, the insurance company will see you as a greater risk and your premiums will be higher.
• Riders: While riders can help expand your coverage, they’ll also increase your premiums. Consider what riders you need and try to keep them to a minimum to manage your policy expenses.
• Habits: Risky hobbies and habits will make you more expensive to insure. For example, if you regularly snowboard or you live in a more densely populated area where traffic is more likely to be an issue, which can lead to more accidents, your premiums will cost more.
• Waiting period: Longer waiting periods cost less for premiums because the insurance company won’t have to pay out as much on a claim. For example, if you were to break your arm but have a waiting period of 90 days, your benefits wouldn’t even start before you make it back to work in most cases.

How to Get a Disability Insurance Policy

You can purchase disability insurance through work or as an individual. If your work offers it, you might have access to short-term disability and long-term disability policies. You’ll need to elect to enroll in these coverages when you start with your employer or during the open enrollment period. 

Ask your employer about qualifying events when you can make changes to your insurance coverage or when you can add the coverages. Going through your employer is often more favorable because they get group rates or negotiated rates for insurance, making it more affordable. Plus, it’s convenient to have your employer deduct the premiums from your paycheck so you have less to manage.

If you are self-employed or want to purchase disability insurance on your own, you can do so. You’ll pay for long-term disability insurance with after-tax dollars, so benefits are generally tax-free. A good way to decide which individual policy to buy is to talk to your financial advisor. If you don’t have a financial advisor, you can talk to an insurance professional. But it’s often better to work with a financial advisor because disability insurance is designed to cover financial commitments.

Compare the Best Disability Insurance from Benzinga’s Top Providers

Find the best disability insurance plans from these leading insurance providers.

Protect Your Finances from Unforeseen Circumstances

Much like life insurance, disability insurance helps protect you from unforeseen circumstances. You can’t plan for everything, but you can purchase insurance that protects you. Review your unique financial needs and purchase disability insurance that will provide the protection you need.

Frequently Asked Questions