So we understand that short-term disability is an insurance that helps you have peace of mind in insuring your ability to make an income should you become sick or injured for a short period of time.
But the question often comes up: “How much should I get?” i.e. How much of a person’s income will they need to replace what they were making when they were working full time, or at least how much should a person insure so they both receive enough in short-term disability benefits to keep up on bills and other payments as well as not break the bank paying monthly premiums when not collecting short-term disability benefits?
The answer? It depends. Remember, with short-term disability insurance, you’re insuring a very important asset. Not your income, but your ability to make an income, thereby protecting your income. That thought must come into consideration when planning for how much of your income you should protect and plan to replace should you be put out of the workforce for a brief amount of time.
Take a moment and consider how much of your income you would be comfortable losing before you would no longer be able to afford excess goods. Now consider how much of your income you could lose before you could no longer afford your mortgage or rent payment. Your utility bills. Your groceries.
Even though I am asking you to think critically about this subject, the industry does have guidelines for how much a person should insure when it comes to short-term disability. A person should spend no more than 1-2% of their annual income on short-term disability premiums. This should give them somewhere in the ballpark of 40-60% gross income.
It’s important to note that gross income is a person’s income before taxes are taken out, in which case you have net income. To determine what your gross income is, take out your last pay stub and add back in the amount of money that was taken out in tax withholdings and other payments such as to a 401(k) and you’ll have your gross income for that pay period. Now use that to find your gross pay on an annualized basis.
Disclaimer: This information does not constitute financial advice. For specific information for short-term disability policy plans and features, consult your local insurance agent.