How to Calculate Your Disability Insurance Monthly Benefit.
How Much Disability Insurance Monthly Benefit Do You Need?
One of the main choices you make when choosing Disability Insurance is determining the “monthly benefit.” The monthly benefit is the amount of money the insurance company offering your Disability Insurance policy sends you each month you are disabled because of accident or sickness and cannot work.
The monthly benefit is sent to you after the elimination period, the waiting period of 1-6 months (the most common choice is 3 months) between the date you are disabled and the benefits begin.
The easiest way to determine your monthly benefit is to ask yourself a question, “what is the total amount of my monthly family budget?”
The spreadsheet shown here is one example of how people list their family budget. Total up those monthly expenses we all have; rent or mortgage payment, insurance premiums, utility costs, groceries, and purchases. Some of us have a car payment, or maybe a student loan payment. Parents have extras in their list; childcare costs, school and activity fees, etc.
What is that monthly amount? For most people the number is very close to what their take home pay is every month (they have their income allocated in their family budget). For some it may be a lower number than that.
You need that amount of money each month, to pay for expenses, need and wants. Without that amount of money, you cannot fund your family budget. A disabling injury or illness would prevent you from working and earning your income. Disability Insurance steps in at your disability and continues to fund your family budget!
The Insurance Company Does Limit The Amount of Monthly Benefit You Can Choose.
Once you have determined the monthly amount of money you need to fund your family budget you know the exact monthly benefit for your DI policy, right? Well, maybe.
Disability Insurers limit the amount of benefit they will offer you in a DI policy to approximately 60-75% of your gross monthly income. This percentage approximates as your “take home pay.” That amount of money we keep from our gross income after Federal and State taxes are deducted.
Insurers do this because they want to make sure you can cover your expenses if disabled that you currently have, but do not want to entice anyone into seeking out disability with a higher monthly benefit than the insured’s current take home pay.
Let’s use an example to illustrate this, our clients Brent and Lindsey. Brent works in the tech industry, and his monthly gross income is $8,000. His take home pay is $7,400 monthly (80% of his gross pay).
Brent and Lindsey have one child, and their family budget currently sits at $7,250. Just below Brent’s take home pay. So if Brent chooses a $7,250 or $7,400 monthly benefit he will know his family budget stays funded if he is disabled and cannot work.
But…the insurers we reviewed capped their offering of monthly benefit to those with occupations in the tech industry to 75% of gross monthly pay. This means the total benefit offered to Brent was $7,000 monthly. Just short of his family budget.
In this case, we accepted that $7,000 benefit, as Lindsey works too, and her income could bridge the gap in the case of Brent’s disability and receiving the monthly benefit from his Disability Insurance policy.
