The question of “how much short-term income protection insurance do I need” may seem silly. I could imagine your response would be “the same amount as I earn every other week when my paycheck arrives.” But, when it comes to Income Protection Insurance, the answer isn’t as easy as it would seem.
Income Protection Insurance wasn’t created to protect your entire salary, it was created to protect a healthy portion so you can live your day-to-day life. We recommend having enough insurance to at least cover your fixed expenses each month, though you can insure up to 80% of your monthly pay.
In this article, we’re going to help you figure out the bare minimum amount of your income you should consider covering, those fixed expenses we mentioned above. The best part, if you haven’t had a clear understanding of what you spend your money each month, you should have a better understanding by the end of this article.
Let’s talk about need. Need is a word that seems relative. Hell, I feel like I need to binge Netflix every night, but when I drill down to the heart of the question, of how much money do I need to have come in every month to keep my life in order, that’s a whole different question. Let’s define need before we develop a plan for figuring out your need. According to the dictionary.com, the definition of need is “a requirement, necessary duty, or obligation.”
Before we begin calculating our needs, we have created this handy disability income calculation worksheet to help keep your calculations in order while you go through the process.
In our opinion, the best place to start is with the three necessities of life: food, water, and shelter. How much does it cost to have a roof over your head each month? Consider your rent or mortgage payment each month because you’ll want to make sure you have enough money to keep you in your living space. From there, you’ll have to drill down (this is where the water part comes in) how much do you spend on utilities monthly? We’re talking, electricity, water, heating, etc. Utilities may be included in your monthly rent, but if it’s not, make sure to calculate it in because if you’re disabled, the last thing you’re going to want is to have your water turned off.
Your next consideration, the amount you spend on food because we all need to eat right! Whether you spend it all on groceries or if you eat out a bunch, you’ll have to eat while you’re disabled so make sure this is a part of your calculation. Btw, if you pride yourself on cooking more than eating out, you should at least consider that you may order food more while you’re out on disability because, depending on the type of disability, you may not be able to cook or may not have the energy to cook.
After we’ve gotten the basics covered, it’s time to look at your debts. Do you have a credit card you pay monthly or are you one of the 44 million Americans that have student loans? Make sure you get every one of these monthly payments into your calculation. Your debt holder may be willing to work with you if you don’t have the money initially, but you won’t want to take that chance if you can help it because being late with your debt payments can be devastating in the long term.
Perfect! We’ve got food, water, shelter, and debt payments done, you’re crushing it! But, of course, there’s more you need to consider. If you’re disabled, how would you get around? Use your car (that you may have monthly payments on) then you’ll need to get gas and maintained. Using Uber, that costs money each trip. Either way, it all gets calculated into your monthly need.
Tack on any monthly insurance costs and (if you’re a parent) the cost you may incur in additional childcare and you’re still not done because there’s another, insidious, hidden cost to a disability: The medical expenses you’ll incur from your disability when your unable work.
We’ve found that this is usually an element of fixed monthly costs people do not take into account because they haven’t happened yet. But rest assured, they will come and when they do, if you’ve taken the right precautions, your insurance coverage should be able to help get you through until either you are better and back at work, able to tap into a Long-Term Disability Policy or apply for Social Security Disability Insurance.
Finally, take a moment to think about the things you can’t live without. I’m a huge fan of a morning coffee from my local coffee shop, but I could also do without Netflix for a bit. Either way, it’s good to consider all the little things in life that would help keep you a least a bit happier during a disability. If you need ideas on what these things may be, look over your monthly bank statement or credit card statement. You’ll see trends in spending that you may not think about on a day-to-day basis.
Once you’ve considered all your monthly, fixed expenses and the things you can’t live without adding them all together and you’ll get the amount of your income you need to insure to get by while you’re out of work on disability.
Again, if you need a little structure around putting these numbers together, you can download a copy of our handy disability income calculation worksheet to get you started.
So that’s it. You have the total amount of monthly cash flow you need to insure to get through a short-term disability. Your next step is to take this information and find the insurance policy that fits your needs the best. You can learn a little more about what goes into the calculation of an Income Protection Insurance policy here, so you’re armed with a bit more information as you continue your research.
Let us know if you have any questions by leaving a comment here or email us at firstname.lastname@example.org.