Written By: Cole Buffehr
If you’ve decided to explore disability insurance, one of your first questions is likely to be, “how much will it cost?” A decent rule of thumb for those in their late 20’s or early 30’s is that you can expect to spend about 1%-4% of your annual income on an own occupation disability insurance policy. I like to think of it as sacrificing 1% of your income to protect the other 99% in case something happens to you.
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Exactly how much you will pay depends on a handful of factors. Your occupation (medical specialty for physicians), gender, state where you live, age, and health all affect how much you will pay. Unfortunately, none of these are things you can change on short notice. The good news is that you can structure a policy to fit just about any budget! The single biggest determiner for how much your disability insurance will cost is how you structure the policy.
Let’s talk about each of those things I mentioned in more detail.
Factors That Affect Disability Insurance Price
Occupation
Let’s start with the first one: occupation. Insurance carriers are all about managing the risks they take on and they are fully aware that certain occupations bring with them higher risks of disability claims.
The insurance carriers classify your occupation into an “occupation class” depending on how physically and mentally demanding your job duties are. In some cases, your income level and years of education also factor in. To use an example in the medical field, the chance that a cardiologist or surgeon can’t work due to some numbness in their hands is higher than a psychiatrist.
Related: Physician Disability Insurance
Gender
The gender you identify as also has a big impact on the cost of your disability insurance. Underwriters have access to all of the claim’s data for their company’s policyholders and they all tend to show that women file more disability claims than men. With this information available, underwriters then charge higher rates to women to make up for this additional risk the company is taking on.
Flashback a few years and some insurance companies offered unisex rates through certain discount programs. Unisex discounts allow male and female applicants to get the same rates and included a discount on top of that. Discounts are always nice, but this one was especially beneficial for women as disability insurance premiums for women are generally 25%-40% higher than those for men with all other factors held equal.
Unfortunately, all the carriers have since moved away from unisex discounted policies in the last few years. There are a handful of guaranteed standard issue (GSI) policies at specific teaching hospitals that will offer unisex rates, but those are few and far between.
The State Where You Live
Like many things in the US, insurance is state regulated. Some state laws limit what features or products are available in certain states. Remember how we just talked about how a woman and a man with otherwise identical profiles will pay different prices just based on their gender? Some states have actually passed laws against this!
If you’re a woman living in Massachusetts, Ohio, or Montana, you should strongly consider getting disability insurance while you live there. If you already had a policy and then moved to one of those states, one of our independent financial advisors will be able to compare your current policy to one you might be able to replace it with.
Thankfully, once you get a policy in one state, you don’t have to get a new one if you move to a new state. If you got a policy with a gender-neutral discount in Ohio, that discount should continue to save you money if you move later.
Disability and life insurance is quite a bit more expensive across the board in California and some carriers’ newer products are not yet available there. Getting a policy in other states may affect your premium in other ways, but they’re not always consistent with all the carriers. It’s definitely a good idea to get a quote and revisit your coverage before and after moving to a new state.
Additional reading: 14 Facts About Disability Insurance
Age and Health
This one should come as no surprise. The older you are, the more expensive disability insurance will be for you, plain and simple. Every year you can expect the cost of insurance to go up by 5-10% (i.e., less of an increase for 31-32 then it is for 55-56).
Arguably the largest price determinant is your health. When you apply for a disability insurance policy, you fill out an application and then go through medical underwriting, which is the carrier’s process of evaluating your current health and medical history. Upon review, not only can they exclude features or exclude coverage of certain injuries or ailments, but they can also place a flat “rating” on the policy (i.e., 25% rating means 25% more expensive than a non-rated policy).
That’s one of the biggest reasons why we recommend that those who need disability insurance look into coverage sooner rather than later. Last time I checked, no one is getting younger and typically the medical file only gets thicker the older we become.
The Policy’s Structure
Every disability insurance policy has a few basic components: a monthly benefit, a benefit period, and an elimination/waiting period. I’ll touch on the monthly benefit in the next section.
Your benefit period is how long you can be on claim for a long-term disability. Some common timeframes are 2 years, 5 years, until age 65, age 67, or age 70. The longer your benefit period, the more your policy will cost.
Long-term disability insurance is intended to only pay out for “long-term” disabilities. After filing a claim, you must wait a certain amount of time before you will receive your disability income. Every carrier offers 90 and 180-day waiting periods and some offer 30 or 60-day options as well. The less time you have to wait to get your benefit, the more your policy will cost.
Riders are additional features you can elect for your policy if you qualify for them. One type lets you increase your benefit amount in the future without having to go through medical underwriting again. Each rider has different costs with each insurance company, so be sure to work with an independent agent who can show you multiple options for how to structure your policy.
Related: What to Look for in a Disability Insurance Policy
The Amount of Coverage
There isn’t a one-size-fits-all type of policy. How much income do you need to protect? If you want to play it safe, get as much coverage as you can qualify for. At the least, you want to fill in the gap of coverage between your group coverage through work and your monthly take-home pay.
Most employers offer some type of group long-term disability coverage, but very, very few offer enough group coverage to adequately cover your full income. Typically, they will cover a certain percent of your gross monthly income up to a specified limit, but this benefit is usually taxable as income if you go on claim, so you’ll end up getting less than you expect.
Depending on your income and what income protection your employer gives you, you could either have a small difference between your group coverage and income or a substantial “gap” which is what you would want to fill in. If that gap is small, you may only need a small policy and it will likely be pretty affordable. If that gap in coverage is large, you will need a bigger policy and your premium will be higher as a result.
Related podcast episode: The Importance of Individual Disability Insurance and The Pitfalls of Group Coverage
So, How Much Will You Pay For Disability Insurance?
To some extent, that’s up to you. The only sure way to find out is to apply to see how you qualify. Anyone can run quotes and throw numbers around, but it’s all meaningless if you get declined for a policy.
The best way to find out how much you’ll pay for disability insurance is to submit a free, noncommittal application, see what you get offered, and then go over some options for how to structure the coverage and decide what you want to pay. If this sounds like a good way to look into disability insurance, let us know! We would be happy to take you through that exact process and then take the time to go over a detailed list of your options before you have to commit to anything.
Do you have specific questions about your specific situation? Feel free to contact us and we’ll do our best to get back to you with answers.
For more information about disability insurance, check out some of our other blog posts or our podcast, Financial Clarity for Doctors.
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