One of the most common causes of income loss is through a disability. While most disabilities cause only temporary loss of income, any income loss can be devastating if you are not financially prepared. This calculator helps you determine how much disability insurance you may need to cover expenses during such a disability.
Disability Insurance Definitions
- Current monthly expenses
- Your total monthly living expenses. Remember to include your home or rent payments, food, clothing, gas, phone and other monthly expenses.
- Disability monthly expenses
- Your monthly expenses while you are disabled. This amount is usually a little less than your original monthly expenses. The default value for this field is calculated as 70% of your current monthly expenses. You should keep in mind, however, that many expenses such as your mortgage, rent, utilities and food will most likely remain the same as before you were disabled.
- Length of disability
- The number of months you expect a disability will prevent you from working. A common mistake is to underestimate the time it takes to get back to work.
- Current monthly coverage
- Your current monthly disability coverage. Make sure to include any disability coverage supplied by your employer.
- Length of coverage
- Number of months that your current monthly coverage will last.
- Annual inflation
- This is what you expect for the average long-term inflation rate. A common measure of inflation in the U.S. is the Consumer Price Index (CPI). From 1925 through 2015 the CPI has a long-term average of 2.9% annually. Over the last 40 years highest CPI recorded was 13.5% in 1980. For 2015, the last full year available, the CPI was 0.0% annually as reported by the Minneapolis Federal Reserve. If you are disabled for a short period of time, inflation is usually not a very important factor. However, you may need to consider the effect of inflation if you remain disabled for more than a few years.