During your working years, your ability to earn income is your
greatest asset. If you don't have an adequate source of
replacement income, a disability can quickly turn into a
Protect yourself by making sure you have enough insurance to
cover your needs. Calculate the minimum disability insurance
benefits you need by using this formula:
Current Monthly Living Expenses - Reductions in Spending -
Income From Other Sources = Minimum Disability Insurance
Current monthly living expenses
First, determine how much you're spending now.
If you have a current monthly budget, you know how much money
you need to maintain your lifestyle and spending habits. (And if
you don't live on a budget, now is a great time to start!) Make a
list of all your monthly expenses. For occasional or annual
expenses, such as gifts for the holidays, calculate your annual
expenses and divide by 12. Don't forget to add a miscellaneous or
"life happens" category. Look through old receipts and bank
withdrawals to make sure your budget is accurate and
Another way to determine how much money you and your family go
through in a month is by looking at your take-home pay. If it's
all gone at the end of the month, that's about how much you
spend. If you're putting money into savings and investments,
you're spending that much less. Think of this method as a reverse
budget -- you take your current cash outflow and work backward to
your monthly living expenses.
Reductions in spending
Next, determine how much less you might spend if you weren't
You generally don't need the same level of income when you are
disabled as you did when you were working. In fact, you can
typically only purchase disability insurance for about 60% of
your predisability income.
Consider the following reductions in spending that you could
make if you became disabled:
If you drive to work, you can probably assume it costs you
$0.50 per mile.
Workday lunches and breaks.
If you eat out every day and buy the occasional latte, you
could easily save $10 to $30 per day when you are not
Being unable to go to work can save thousands of dollars per
year in clothing expenses.
It's sad, but life on disability may not include the vacations
you're used to. On the bright side, you'll have fewer expenses.
You may even generate income from selling those jet skis, ATVs,
and other toys.
Most of us can make cuts in our budget if we have to. Moving to
a smaller, perhaps one-story house may even be a good
Income from other sources
The following items may reduce the amount of disability insurance
you need to purchase:
Income from savings and investments.
This includes interest and dividends, capital gains, rent
income, and other sources of income.
Other disability income.
You may qualify for more than one type of disability payment if
you become disabled.
Increased income from spouse or partner's
If you share finances with someone, such as your spouse, you
may have a plan that if one of you becomes disabled, the other
picks up the slack. This is most practical if you both have the
capacity to make a living, but one is working less than
In most cases, couples should buy disability insurance for
both working spouses. If you're dependent on two incomes, it only
makes sense. If one of you becomes sick or is injured, the other
may prefer to take care of the disabled spouse rather than
immediately return to work. And if something happens to the
relationship, dependency on a spouse's income only makes it
Let's take Lisa -- age 45 and single -- as an example for
calculating disability insurance needs. Lisa brings home $5,000
per month after taxes and other deductions.
Lisa's budget shows that she needs $4,500 per month to live.
She regularly puts $500 per month into savings, so that checks
out as a realistic number. ($5,000 take-home pay - $500 actual
savings = $4,500 budgeted expenses.)
If Lisa became disabled, she thinks she could save $1,000 in
monthly expenses by not commuting or eating out for lunch,
without too severely cutting costs otherwise.
Lisa isn't married, so she can't rely on a spouse to support
her if she can't work. But she earns dividends and interest of
about $500 per month.
Lisa's minimum disability benefit can be calculated as
- Current monthly expenses: $4,500
- Reduction in spending: $1,000
- Income from other sources: -$500
- Minimum monthly disability benefit:
Disability insurance is great -- but only if you have enough
of it. It's worth the time you spend to determine whether you
have enough disability insurance benefits and to recalculate the
amount you need every few years or when your income needs
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