Disability Insurance Guide: Income Protection, Coverage & Benefits Explained

The standard advice — replace 60% of income — is a starting point, not an answer. The right number depends on whether your benefits will be taxed, which expenses disappear when you stop working, and which obligations absolutely don’t. Here is the full calculation.

Step 1: Start From Net, Not Gross

If you earn $100,000 and pay $25,000 in taxes, your take-home is $75,000. A tax-free disability benefit of $60,000 replaces 80% of what actually lands in your bank account. A taxable group benefit of the same size replaces only about $48,000 of purchasing power. This single distinction swings the answer by a third.

Step 2: Subtract Expenses That Die With the Paycheck

• Commuting, work wardrobe, payroll taxes — typically 10–15% of spending
• Retirement contributions you would stop making (but note: you also lose compounding)
• FICA — no payroll tax on disability benefits from individual policies

Then add what a disability uniquely creates: care costs, home modifications, therapy not covered by health insurance, and the income your non-working spouse may lose to become a caregiver.

Step 3: The Group-Policy Trap

Employer LTD at 60% sounds adequate until you subtract taxes and remember it ends with your employment. If you would change jobs in the next decade, layer an individual policy now while you are young and healthy — premiums are locked by age and health class, and medical underwriting you pass today may not be available after a diagnosis.

A Worked Example

Age 38 engineer, $110,000 salary, $6,500 employer group LTD benefit (taxable ≈ $3,900 net), mortgage $2,400/month, family of four. Gap: needs about $6,800 net. Individual policy of $3,000/month tax-free closes the hole at roughly $120–$180/month premium depending on benefit period and riders.

Frequently Asked Questions

Should I insure bonuses and overtime?

Individual policies can cover them if documented on the application. Group plans usually insure base salary only — a commission-heavy income needs an individual supplement.

What about Social Security disability?

SSDI approval is difficult (roughly 1 in 4 first applications succeed) and the average benefit is modest. Treat it as a bonus, not the plan. Individual policies often include an SSDI-offset rider — check how it coordinates.

Does workers’ comp replace disability insurance?

No — it covers only work-related injuries, which are a minority of disabling events. Cancer, heart disease and most back injuries happen off the job.

Insure the net income your household actually spends, tax-advantage every dollar of individual coverage you can, and never assume the employer’s 60% survives contact with the tax code.