The Basics of Disability Insurance: Part 3

How Much Is Needed?

There are a few steps you can take to understand how much disability coverage is needed for your given situation. While not exhaustive, this list can be a helpful starting point: 

  1. Assess your income: Start by calculating your current monthly or annual income. Consider all sources of income, including salaries, wages, bonuses, commissions, and any other regular payments. If you have multiple income streams, make sure to add them together to get your total income.
  2. Consider your expenses: Evaluate your monthly expenses, including mortgage/rent, utilities, debts, groceries, transportation, healthcare costs, and other essential expenses. Determine the minimum amount you need to cover these expenses during a disability. It’s important to be realistic and take into account any potential changes in your lifestyle due to the disability.
  3. Determine your desired coverage percentage: Decide on the percentage of your income you would like to replace in the event of a disability. A common guideline is to aim for 50-70% of your pre-disability income, although this can be variable. For example, if both spouses work, it may not be as urgent to pay for 100% coverage on each spouse. Select a percentage that aligns with your financial obligations and lifestyle needs.
  4. Calculate the monthly benefit amount: Multiply your total income by the coverage percentage you selected in step 3. For example, if your monthly income is $5,000 and you want to replace 60% of it, the monthly benefit amount would be $5,000 x 0.6 = $3,000.
  5. Evaluate existing coverage: Determine if you have any existing long-term disability coverage through your employer or other sources. Subtract the amount of coverage you already have from the monthly benefit amount calculated in Step 3. This will give you an idea of the additional coverage you may need.
  6. Adjust coverage amount: Compare the remaining monthly expense amount after factoring in other income sources with the monthly benefit amount calculated in Step 4. If the remaining expense amount exceeds the benefit amount, you may need to consider increasing your coverage. If it’s lower, you might have more coverage than necessary.
  7. Consider policy limitations: Review the policy limitations, such as coverage duration, waiting periods, and benefit caps. Ensure that the coverage aligns with your specific needs and financial goals.

Determining the appropriate amount of coverage depends on many factors, so be sure to consult with your financial advisor. Each situation is unique and requires careful consideration of all relevant facts to arrive at the best solution. 




Luke Brooks, CFP®, ChFC®, RICP®, is an Advisor at The Welch Group, LLC, specializing in providing fee-only investment management and financial advice to families of various backgrounds. Luke is a graduate of Columbia International University, is passionate about helping others achieve their financial dreams, and is a Certified Financial Planner®.



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