How much lump sum disability cover do I need?

Calculating how much lump sum disability cover you need involves thinking through a number of questions.  

1. What do you want the lump sum benefit for? 

The first question you should try to answer is: what do you want to use a lump sum disability benefit for?  

Do you want the benefit to: 

• Pay off debts such as your home loan; 
• Provide for certain financial needs, such as tertiary education costs for your children;  
• Provide for needs you may have on disability, such as adapting your car or home; or  
• Provide for your own and your family’s living expenses. 

If you plan to cover your income needs through a monthly income protection policy, it will be easier to work out your lump sum needs. 

Even if you have an income protection policy in place, it is a good idea to also have lump sum disability cover in place, provided you can afford it.

Should you become disabled the lump sum payment can be used to pay off debt or to invest for your children's tertiary education. If you do not have severe illness cover you may also need to pay for alterations to make your home wheelchair friendly or to modify your car.

2. Income needs 

If you want to provide for your income needs by way of a lump sum benefit, you’ll need to consider: 

• How much you earn. 
• How much you spend on living costs. 
• How much you could reduce these costs by if you reigned in your spending and you no longer worked – you would potentially pay less tax on a lower income, or not pay tax on your disability income, you would commute less, wouldn't need clothes for work and/or may be able to live further away from an urban area. 
• Whether your loans and debts will be paid off with some of the benefit or whether you will need to continue to make repayments. 
• Who depends on your income for support and for how long they will need that support. 
• If you have a spouse, could he or she earn more. 

Once you know how much you need to maintain your lifestyle monthly, you can work out annual amounts you will require, and then the amount you will need until your retirement savings can support you.  

You will also need to consider the impact of time and the inflation on the income you will need. Offsetting that is the returns you may earn if you invest the money to grow until you need it.  In order to convert the lump sum you can invest today to provide an income that grows with inflation, you may need the help of an adviser or an online calculator. 

Offset any savings you already have 

Before you calculate the total lump sum disability cover amount you need, offset it by any savings you already have for your different financial needs. For example, you may have already saved some money towards your children’s education. Alternatively, you may have a policy that will pay out for this need.