It’s generally recommended that disability coverage be chosen to replace 60 to 70 percent of your total taxable earnings. If you purchase disability insurance with after-tax dollars, your benefits will usually be income tax free. If you have group disability insurance provided by your employer, however, benefits will generally be taxable.

Small business owners have special concerns and should consider obtaining professional advice about policy options that protect a business if the owner becomes disabled (e.g., overhead expense policies).

To estimate the benefit amount you would need if you became disabled, ask yourself how much monthly income would cover your living expenses.Would these expenses go up or down if you became disabled? These expenses must be carefully considered. Work-related expenses may go down. Medical expenses may increase. Education expenses may increase as you retrain. Some insurance policies may have premium waivers. By considering all these factors, you should be able to come up with an appropriate amount.

To get an estimate of how much disability income insurance you would need to maintain your current standard of living, complete the following steps using the "Disability Insurance Planning Worksheet" below.

• Complete the top section of the worksheet to estimate your Average Monthly Expenses.
• Complete the second section of the worksheet, Estimated Monthly Disability Income. Depending on your circumstances, you may not receive every kind of disability benefit listed in the worksheet. If you’re married, be sure to include your spouse’s actual or potential income.
• Subtract your estimated total disability income from your total average monthly expenses, and enter the figure in the bottom square. This figure is the maximum amount of disability benefits you need to purchase.