The Insurance Buying Guide: Figuring Out How Much You Need

Disability income insurance can enable you to pay a mortgage and other necessary expenses when a total disability due to an accident or sickness cuts off your income. But exactly how much of this insurance do you need?

To figure this out, you will need to gather some information. This includes: what you make and what you have to protect.

Usually, it's best to use a worksheet when conducting a needs analysis. (See page 292 for a worksheet.) This helps you consider problems, needs, and objectives consistently. It also helps you avoid the main problem that plagues needs analysis: overlooking something.

What you make is fairly simple to calculate. It's the amount of earned income you expect to have during a specific period of time. In most cases, insurance companies calculate this number by asking what you make in salary and other earned income. A good insurance company will ask for some kind of proof of income -- like an IRS W-2 form or other tax document.

Don't attempt to fudge these numbers. If you do, the insurance company will not have to pay you anything in the event of a claim. You'd be amazed how many people blatantly lie on their applications, and then haul their insurance companies into court when they won't pay. Just in case this doesn't sound so bad, it's worth noting that the insurance company wins when you lie. And you wind up with lawyers' bills on top of everything else.

To determine your disability income insurance needs, you also need to calculate how much you need to protect. Among the most common of these issues are educational objectives for dependent children, other family needs, business objectives and retirement goals.

In greater detail, these are the factors that will impact your disability needs most directly:

• Fixed Obligations. Such expenses as mortgage or rent, car payments, utilities, food, installment purchases, insurance premiums, etc., must be itemized.
• Variable Expenses. These are the unexpected, non-fixed expenses that occur from month-to-month, such as car repairs, medical expenses, prescriptions, home repairs, etc. Try to estimate these unexpected monthly expenses to the best of your ability.
• Added Expenses. In addition, there are added expenses due to a person's disability -- additional medication, doctors' bills, prosthetic appliances (such as braces), the rental of a hospital bed or a wheelchair, hospital bills that are not fully covered by hospitalization insurance, etc.