How much disability insurance do I need? 2024 guide

Disability insurance is a unique coverage that can provide you with an income if you become disabled and can no longer work. By replacing your income, the disability insurance benefit will help you by removing undue financial stress while you focus on getting back on your feet. 

However, what most people don’t know is that disability insurance may only replace a certain percentage of your income, and the payout may be limited to a certain amount of months or years. It is therefore vital that you calculate how much disability insurance you need.

This article will help you identify how much disability insurance you may need if a disability affects your ability to earn an income. Also, use our free comparator to explore plans and get free quotes to get exact figures.

What is disability insurance?

Disability insurance, also known as income protection, provides a monthly income to policyholders if they cannot pursue their regular line of work after suffering from a disability. The steady stream of income is great because it provides the insured with the financial ability to support themselves and their families while they get back on their feet. 

Disability insurance is usually divided into two main types: short-term disability insurance (STD) and long-term disability insurance (LTD). The former, short-term disability, provides the insured with income for a limited period of up to 6 months, whereas the latter, long-term disability, commonly provides income benefits for up to 2 years but may also provide coverage until the individual reaches retirement age. 

It should be noted that the terms and conditions of policies vary widely. For example, some policies may offer coverage for partial disability, while others only provide benefits for total disability. Understanding these intricacies is crucial when determining how much disability insurance one needs.

You can use our free comparator below to explore the best disability insurance plans, compare coverage, and get free personalized quotes in no time. Simply click the button below and get instant quotes right here.

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Why disability insurance matters

It plays a significant role in ensuring financial stability in the event of unforeseen circumstances. In the absence of this coverage, individuals who become disabled may face considerable financial strain especially if they are the primary breadwinners for their households. 

Having this coverage can provide a safety net, ensuring that an individual can maintain their standard of living even if they become unable to work. It can cover essential expenses such as mortgage payments, utility bills, and medical costs, alleviating financial stress during a challenging period.

Unfortunately, knowing that you need this type of coverage doesn’t automatically help you determine how much disability insurance you need. 

What are the factors influencing how much disability insurance you need?

Determining how much disability coverage you need depends on several factors. These include your current:

• Income
• Household earnings
• Savings
• Lifestyle
• Financial obligations
• Dependents

It should be noted that your current income is the biggest factor influencing both how much disability insurance you need, and how much you can receive. This is because the amount of money you tend to spend increases with your income level, and disability insurance usually calculates your benefits as a percentage of your income. 

For example, if your policy only pays an income benefit of 60% of your current salary, then you have to factor the reduced income into your situation should you become unable to work. 

On the other hand, if your lifestyle and ongoing expenses are significantly lower than your current level of income, then you likely won’t need the highest level of disability coverage and can instead reduce premium costs by opting for lesser coverage.

Similarly, the amount of your emergency savings also influences the coverage you need. If you have substantial savings, you may be able to offset some of your lost income by dipping into your savings, allowing you to reduce your disability coverage and save money on premiums.

Of course, if you have limited savings then it may be more prudent to accept the slightly higher premiums to have more substantial coverage.

How do you calculate the right amount of disability insurance?

Once you have identified the factors that influence your unique situation, you can start to calculate the exact amount of disability insurance coverage that you need.

• The first step is to estimate your long-term expenses. Include any mortgage or rent payments, utility bills, food, transportation, health care, and other essential costs. Also, account for future expenses related to any potential children's education and necessary retirement savings.
• Afterward, determine how much income would be lost in the event of a disability. Calculate both your current income and then subtract any benefits that you might have received, such as bonuses, worker’s compensation, or social security.
• Finally, compare your anticipated expenses with your potential income loss. The difference between those two amounts is a good starting point for determining how much coverage you need.

As you can see, the above three steps help you calculate the amount of disability insurance you need before turning your attention to the policies themselves. 

Is disability insurance the best choice for you?

In addition to the personal factors influencing your level of coverage, you should also ask the following questions to understand if a policy suits your needs. 

• What percentage of my income will the disability policy replace?
• How long will the benefits last?
• What disabilities are covered by the policy?
• Does the policy cover partial disability or only total disability?
• What are the waiting period options before benefits begin?

By understanding the answers to these questions, you can make informed decisions. For example, if a policy will only provide 50% of your current income as a benefit, but your financial obligations require 60% of your income, the policy in question would not be suitable to your needs. 

You can find answers to all these questions and more by using our comparison tool below. Explore multiple plans and get free personalized quotes right here.

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How much does disability insurance cost?

Regardless of how much disability insurance you need, the actual amount of coverage you can get will always be dependent on the premiums that you can afford to pay. Understandably, the higher the premium that you can afford to pay, the higher the benefits payable on your policy should you become disabled. 

Costs vary between providers, but usually, the premium will range between 1% to 5% of the benefit offered. For example, the CIBC Mortgage Disability Insurance rate for a 30 to 35-year-old is $1.70 per $100 benefit amount, i.e. the premium is 1.7% of the benefit offered. 

However, the actual cost of your private insurance may fluctuate from any public insurance rates published as they tend to be affected by other factors, including:

• Benefit term length
• Waiting periods
• Medical history
• Smoking status
• Additional add-ons

Remember, while disability insurance is a phenomenal financial planning tool, it does provide you with an income. Your disability insurance benefit in Canada may therefore be taxed depending on your situation. Make sure you fully understand how disability insurance will affect you before buying any policy!