Calculating how much coverage you need
Running through what-if scenarios isn't fun, but it is essential to understanding how much coverage you need while avoiding over- or under-insuring yourself. You need to ask yourself what your basic monthly costs are and what your resources are.
Tally up your household's monthly sources of income: any disability coverage, interest from any bank or investment accounts, income from other investments, and your spouse's earnings. You might be able to collect Social Security benefits, but you can't bank on them. If you do qualify, consider it a bonus.
Now add up your monthly expenses, including mortgage and home-ownership costs; food; any debts, such as car loans or credit-card bills; clothing; education expenses; child care; and other basic insurance costs. Subtract these expenses from the income, and you have a rough idea of how much in monthly income you're trying to replace in an emergency.
Assume that insurers will rarely cover you for more than 60% of your income, unless it is provided by your employer who may have an option to increase this benefit to 80% (at your expense). However, this may be enough. If you're disabled, your working expenses will be cut, along with your taxes, and you can scale back your lifestyle a bit. What you want to avoid is losing your home or all your life's savings as a result of a disability and loss of income. In trying to decide how long a waiting period you could swing before needing benefits, ask your employee-benefits manager what short-term benefits you might qualify for in an emergency, such as sick leave or a state short-term disability fund. Take into consideration your emergency fund(s) and investments you could tap for cash (preferably not your retirement fund).