How Much Disability Insurance Do I Need? Calculating Your Coverage

Knowing you need disability insurance is the first step. Figuring out how much you need is the next. Too little coverage leaves you exposed to financial hardship. Too much coverage wastes money on premiums you do not need. The goal is to find the right amount of coverage to replace enough income to keep your household running if you cannot work.

Most financial advisors recommend replacing 60 to 70 percent of your gross income through disability insurance. But the right amount for you depends on your specific expenses, existing coverage, and financial situation. This guide walks you through the calculation step by step, including how to account for SSDI, employer coverage, taxes, and inflation.

The 60-70 Percent Rule

The standard guideline in disability insurance is to replace 60 to 70 percent of your gross pre-disability income. Insurance companies generally will not allow you to insure more than this because they want to maintain your financial incentive to return to work.

At first, 60 to 70 percent may sound like a significant reduction. But consider that when you are not working, you no longer pay payroll taxes, commuting costs, work clothing expenses, or potentially retirement contributions. Your actual take-home pay might already be only 65 to 75 percent of your gross income after taxes and deductions. So replacing 60 to 70 percent of your gross income may come close to replacing your current take-home pay, especially if your benefits are tax-free.

The tax treatment of your benefits is a crucial factor. If you pay your own premiums with after-tax dollars, your disability benefits are generally tax-free. If your employer pays the premiums, the benefits are taxable. This difference can significantly change the effective replacement rate.

Step 1: Calculate Your Monthly Expenses

Start by listing your essential monthly expenses. These are the bills you must pay regardless of whether you are working. Do not include discretionary spending that you could cut during a disability.

• Housing: Mortgage or rent, property taxes, homeowners or renters insurance.
• Utilities: Electricity, gas, water, internet, phone.
• Food: Groceries and basic household supplies.
• Insurance: Health insurance premiums, auto insurance, life insurance.
• Debt payments: Student loans, car payments, credit card minimums.
• Childcare and family: Childcare costs, child support, or eldercare expenses.

Add these up to get your minimum monthly income need. This is the floor that your disability income must cover to keep your household stable.

Step 2: Add Up Your Existing Coverage

Before buying additional coverage, take stock of what you already have. You may have more protection than you realize, or you may discover significant gaps.

• Employer group LTD: Check with HR. Most group policies replace 60 percent of base salary, often with a monthly cap of $5,000 to $10,000. Note whether premiums are employer-paid (taxable benefits) or employee-paid (tax-free benefits).
• SSDI estimate: Use the SSA's online benefits calculator to estimate your SSDI benefit. The average is about $1,630 per month in 2026. Remember that SSDI only covers total disability and has a 5-month waiting period.
• State disability programs: If you work in California, Hawaii, New Jersey, New York, or Rhode Island (or DC), you may have state-mandated short-term disability benefits.
• Other income: A spouse's income, rental income, investment income, or other passive income that would continue during a disability.

Step 3: Find Your Coverage Gap

Subtract your existing coverage from your monthly expenses. The difference is your coverage gap, which is the amount of additional disability insurance you should consider purchasing.

Here is an example for a worker earning $75,000 per year:

• Monthly gross income: $6,250.
• Target replacement (65%): $4,063 per month.
• Employer LTD (60% of base, employer-paid): $3,750 per month before taxes. After a 25% estimated tax rate, the effective benefit is about $2,813 per month.
• Coverage gap: $4,063 minus $2,813 equals a gap of $1,250 per month.

In this example, an individual disability policy providing $1,250 per month would fill the gap. If you pay the individual policy premiums yourself, those benefits would be tax-free, making the effective combined benefit even stronger.

Examples at Different Income Levels

Your income level significantly affects both your coverage gap and the cost of insurance. Here is how the math looks at different earnings:

• $40,000 per year: Monthly gross is $3,333. At 65 percent replacement, you need $2,167 per month. SSDI alone might cover most of this for some workers, but the 5-month wait and strict qualification remain concerns. An individual policy costing $33 to $100 per month could supplement employer coverage.
• $80,000 per year: Monthly gross is $6,667. At 65 percent replacement, you need $4,333 per month. Employer LTD at 60 percent of base covers $4,000 before taxes. After taxes on employer-paid premiums, the gap could be $1,000 to $1,500 per month. An individual policy costing $67 to $200 per month fills this gap.
• $150,000 per year: Monthly gross is $12,500. At 65 percent, you need $8,125 per month. Many group policies cap at $5,000 to $10,000 per month, which may not reach 60 percent of salary. The gap could be $3,000 or more per month. High earners often need substantial individual coverage to maintain their standard of living.

Choosing the Right Benefit Period

The benefit period determines how long your policy pays if you remain disabled. This choice has a major impact on both your premiums and your long-term financial security.

A 2-year benefit period is the least expensive option but provides limited protection. A 5-year benefit period is more affordable than to-age-65 coverage and may be sufficient if you are within a decade of retirement. A benefit period to age 65 is the most comprehensive and protects against long-term disability that could span decades.

If you are in your 30s or 40s with 20 to 30 working years ahead, a benefit period to age 65 is generally the wisest choice. The premium difference between a 5-year and a to-age-65 benefit period may be modest compared to the additional decades of protection.

Inflation and the Cost-of-Living Adjustment Rider

A disability that lasts several years means your fixed benefit amount loses purchasing power over time as inflation increases the cost of living. A cost-of-living adjustment (COLA) rider addresses this by increasing your benefit while you are on claim, usually by 3 percent per year or tied to the Consumer Price Index.

Consider this example: if you receive $4,000 per month in disability benefits without a COLA rider and remain disabled for 15 years, that $4,000 would have the purchasing power of roughly $2,700 in today's dollars at a 3 percent annual inflation rate. With a COLA rider, your benefit would grow to approximately $6,240 per month, maintaining your real purchasing power.

COLA riders typically add 10 to 20 percent to your premium. They are most valuable if you are young, because a disability at age 35 could last 30 years. If you are in your 50s and nearing retirement, the inflation impact over a shorter benefit period is less significant.

What Coverage Costs and How to Save

Individual disability insurance typically costs 1 to 3 percent of your annual income. The wide range is due to several pricing factors:

• Age: Younger applicants pay less. Premiums increase significantly with each decade of age.
• Health: Pre-existing conditions can increase premiums or lead to exclusion riders.
• Occupation: Desk workers pay less than those in physically demanding or hazardous occupations.
• Benefit amount and period: Higher benefits and longer benefit periods cost more.
• Elimination period: Choosing a 180-day elimination period instead of 90 days can lower premiums by 15 to 25 percent.

To save on premiums, consider a longer elimination period if you have an emergency fund, choose a benefit period that aligns with your retirement timeline, and compare quotes from multiple insurers. Our guide to the best disability insurance companies can help you evaluate your options.

Calculating your disability insurance needs does not have to be complicated. Start with your expenses, subtract what you already have, and shop for a policy that fills the gap. If you are new to disability insurance, start with our overview of how disability insurance works to understand the basics before making a purchase decision.