How Much Income Protection is Right for SoCal?


Are you trying to calculate how much Income Replacement Insurance you might need? What happens in the event you find yourself unable to go to work due to an unforeseen accident or disability? You’re not alone. Most people feel as if they’re shooting in the dark. At best, they are just hoping they have enough to cover their needs if or when the day might come. 

You shouldn’t have to guess when it comes to answering this important financial question. Rather than cross your fingers and hope for the best, why not simply take a moment to consider the facts? Purchasing the right amount of disability insurance should never be a guessing game

How Much Should Income Replacement Insurance Cover?

The recommended Income Replacement Insurance is between 65% and 75% of your Gross Income. So, if your current benefits are under that amount, you’re not going to have enough coverage. 

Secondly, you should consider the median home prices in your area. Let’s say you live in Southern California, where the average home costs $795,000. Obviously, your monthly mortgage payments are significantly higher than in other parts of the country. How much higher? Well, the average monthly mortgage payment in the U.S. is around $1,500 per month. In California, that average is closer to $3,500 per month.

Not only this, but taxes, fuel costs and other cost of living expenses in SoCal are also much higher than most regions in the United States. Therefore, the amount of Income Replacement Insurance you’ll need in Southern California is a lot higher than what you’ll need if you live almost anywhere else. 

Customize Your Income Protection Policy

This is why it’s crucial for you to secure an income protection policy that’s tailored to your standard of living. Trust me, the last thing you want to do when you learn you have a serious illness or injury is to have to sell your home or liquidate your assets just to get by. What will it take to maintain the same standard of living you enjoy right now? If you want to stay in Southern California, you need an income replacement insurance plan designed for SoCal quality of life.

In SoCal, we have very high-income professional opportunities—attorneys, accountants, physicians, surgeons, technology and life sciences, etc. It’s very common for a professional to earn $300k to $500k per year in California.

Earning $500k per year is the equivalent to earning $26k per month after income taxes. As I’ve said, on average, people spend between 65% to 75% of their gross income. However, when you factor in your income taxes, it comes much closer to spending 100% of your net earnings.

What Are Your Financial Needs and Goals?

If you are not in a position to retire tomorrow—meaning you still have financial milestones to hit before you’re ready for retirement—you should protect as much of that high monthly income as you can.

We might be tempted to think that someone earning $500k per year doesn’t need to protect all of their net earnings this way. Even if you have a surplus of savings to contribute to retirement funds or investments, you still want to have enough monthly income to replace that surplus. Why? Because you have to plan in case you aren’t able to go back to work for several years. Where will you be financially when—or if—you are eventually able to return. You may realize you weren’t replacing that surplus/savings income sufficiently and now you’re upside-down. 

Replace the Income You Need

We all understand the power of compound interest, but it works both ways. If you end up having to withdraw from those funds you’ve put away in your investment or retirement accounts to cover your expenses, you’re not just taking away that $100k. You’re also taking away the compound interest that you could’ve been earning for 10, 20 or even 30 years afterwards. $100k compounded over 20 years is $611,590 assuming a nominal 10% interest rate. That means by using $100,000 of your savings at age 45, you’re costing your 65 year old self over one half of a million dollars!

Simply put, if you live in Southern California, your disability insurance benefits require special attention. You have to cover your financial well-being in the event you find yourself unable to work for an extended period of time. Don’t leave these questions to chance. Take a good, hard look at your Income Replacement Insurance policy and evaluate now before it’s too late.

Have questions? I’m happy to help.