Disability Insurance

You normally should plan on replacing at least 60% of your net after-tax pay and preferably 80% if you can afford the additional coverage. If you purchase disability insurance with after-tax dollars, your benefits usually will be income tax-free. 

However, be aware that if you have group disability insurance provided by your employer, these benefits generally will be taxable. Small business owners have special concerns and should consider talking to an expert about overhead expense policies and other special considerations.

To correctly determine the actual amount of coverage you would need if you became disabled, ask yourself how much monthly income would cover your living expenses. Would these expenses go up or down if you became disabled? These expenses must be carefully considered. Work-related expenses will go down.  By considering all these factors, you should be able to come up with an appropriate amount. To get an estimate of how much disability insurance you may wish to have, you should calculate how much you spend each month. The following chart can help get you started:

Monthly Expense Record

Current Monthly Expenses

Total Expenses  Now that you have an estimate of your living expenses, subtract any income you would receive from other sources.  If you are married, you'll want to consider the actual or potential earnings of your spouse. Bear in mind that the following resources may or may not  be available to you, depending on the nature of your disability and how long you are disabled.

Total Monthly Disability Income Available
(use appropriate after-tax amounts)
 

Total Expenses-Total Income Available
The amount that remains after subtracting this income from your total expenses is the maximum amount of disability coverage you should be shopping for. Write that figure (up to a maximum of 80% of your after tax pay) here: _____________