The Insurance Buying Guide: Charting Your Needs
Most insurance companies use fairly standard worksheets to determine a monthly expense estimate that relates to disability coverage needs.
The worksheet below will help you add up your expenses, such as mortgage or rent, utilities, food, auto or transportation expenses, tuition or education expenses, clothing, outstanding consumer loans or installment purchases, insurance premiums, medical or dental care costs, taxes and miscellaneous expenses.
Then it will help you look at your other sources of funds in the event of a disability, and consider your potential needs, should you become disabled. If the final income figure is negative, check your numbers -- with an eye toward making sure that your expenses are all covered and that the non-earned income is absolutely reliable. If your final number is still negative, you don't need to worry about disability insurance -- you should be thinking about retiring.
For most people, the final income figure will be positive -- and probably disturbingly large. And remember, this is only a monthly number.
Disability Income Needs Assessment Worksheet PART 1 Enter your monthly expenses related to each of these items and add them for
Subtotal 1. If possible, average what you spent during each of the last sixth months. Mortgage or rent __________________ Utilities __________________ Phone __________________ Food __________________ Auto expenses/transportation __________________ Tuition/education expenses __________________ Clothing __________________ Loans and installment purchases __________________ Insurance premiums (car, home, etc.) __________________ Medical/dental care costs __________________ Miscellaneous expenses __________________ Taxes
Subtotal 1 __________________
PART 2 Enter your monthly income provided by each of the following sources of "non-earned income." For the insurance items, check each policy's maximum benefit. For the other items, average your costs over the last six months, if you can. Add them to come up with Subtotal 2.
Group disability insurance benefits __________________ Other insurance benefits __________________ Interest income __________________ Dividends __________________ Rental income __________________
Deferred compensation, residuals, royalties, etc. __________________
Subtotal 2 __________________
PART 3 Subtract Subtotal 2 from Subtotal 1. This will provide you with the monthly income figure that you need to insure against disability.
Subtotal 1 __________________ minus Subtotal 2 __________________ equals Total monthly income to be insured __________________
In order to estimate the likely total loss from a disability, refer to the disability duration chart below.
The Average Duration of a Disability that Lasts for More Than 90 Days
Age at Onset Duration
- 30 4.7 years
- 35 5.1 years
- 40 5.5 years
- 45 5.8 years
- 50 6.2 years
- 55 6.6 years
Source: Journal of the American Society of Certified Life Underwriters
Then multiply the total monthly income you need to insure by the average duration of a disability that lasts at least 90 days.
Total monthly income to be insured __________________ multiplied by Average duration of a disability that lasts at least 90 days equals __________________ Average long-term disability loss __________________
The key to staying in good financial shape, even while you are disabled, is covering that monthly figure. Now you know the three numbers you need to tell your insurance company or agent when you're shopping for disability coverage: the total monthly income to be insured, your current monthly earned income and the average long-term disability loss. These numbers provide a range within which your income coverage (whether it's disability insurance, Social Security or simple cash savings) should fall.
