The cost of disability insurance is based on multiple factors. Although similar to other types of insurance, disability insurance has unique differences. The cost of your car insurance is based on how many years you’ve been driving (your age), the value of your car, your driving history and a few other factors. The cost for disability income insurance is based on similar components such as age and your medical history.
One factor affecting the cost that is unique to disability insurance are the policy features chosen by the insured. These policy features and optional riders also impact the price.
You can expect to pay between 1-4% of your annual income for your disability insurance coverage. This may seem high when compared with auto insurance but consider the length of time and amount of financial benefit you could receive throughout the life of the policy.
Below are details about the factors affecting the cost of a disability insurance policy.
Insurance companies underwrite disability coverage based on the risk of an applicant filing a claim. The older you get, the greater your risk of experiencing a disability. This increased risk is not only related to the aging process. The older we get, the more time we’ve been in the workforce which increases the risk for occupational and/or repetitive injuries.
Because there is a greater risk, disability insurance is more costly for older people. This is one of the many reasons we encourage professionals to think about disability income insurance early in their careers when it’s more affordable.
Gender Influences on Price
All other factors being equal, women can pay up to 40 percent higher premiums for disability insurance. While this may not seem fair, from the insurance company’s perspective, women typically have more risk of experiencing a disability. Women suffer more disabilities that impact their careers and statistically they file more claims than men. Disability insurance claims for women also typically last longer.
Something women can do to help even out the premium discrepancy is to find a policy that offers unisex rates. A unisex rate can reduce a woman’s insurance premium by 30-50 percent. Unisex rates are common among multi-life cases – such as a group of co-workers from one employer or a professional association – where the insurance company can spread the risk over multiple customers.
Health Affects on Cost
Insurance companies will pay close attention when assessing your health. You will be asked about your medical history and current health conditions. These questions will also include your past and current tobacco use. You will also likely have to submit to a paramedical exam.
The paramedical exam is like a physical checkup. An independent, third-party vendor will conduct the exam which is paid for by the insurance company. The paramedical examiner will record your height, weight, body mass index, pulse and blood pressure. The examiner will also collect blood and urine and other data depending on your medical history and the requirements of the underwriter.
ExamOne is an example of one company performing paramedical examinations. Find out what to expect in their exam here.
The paramedical examiner will also ask several questions about your health. Some questions will be repeats of what you provided on the application. These include:
- Family medical history
- Pre-existing conditions
- Medications you’re taking
- Whether you drink alcohol or use tobacco
The answers you provide will be used to validate the health information you provided in your application. They also inform underwriters of any medical concerns that could affect your risk.
How much you pay for disability insurance heavily depends on what you do for a living. A pilot potentially encounters more risk in their daily duties than someone working in an office. A less obvious comparison is a construction worker and a construction foreman. The construction worker performing the manual labor has more risk than the foreman who is in a managerial role. Most insurance companies will also ask questions about the regular duties you perform, to get a better understanding of your occupational risks.
Different jobs are grouped into specific risk classes; these classes are slightly different for each insurance company. The occupational classes are numbered on a scale of 1 to 5 or 6. Typically, the higher the number, the less risk an insurer considers that profession. Occupations with lower numbers have more risk and higher premiums. Factors considered when establishing occupation classes include:
- The likelihood of becoming disable because of risk associated with a particular job
- The amount of strenuous manual duties
- The probability of an insured returning to work following a disability
- The disability claim experience associated with the profession
Because there are differences in occupation classes and insurance coverage features between disability insurance companies, we typically provide quotes from multiple carriers.
The amount of disability insurance money you can receive is based on a percentage of your income. Therefore, an important part of the underwriting process and determining how much your cost will be is based on your income. This is done through financial underwriting. The insurance company’s underwriter will assess your…
- Earned income
- Unearned income – income from property, pensions, inheritance, etc.
- Net worth
- Your bankruptcy history, if applicable
You will have to provide personal tax returns from the previous year. In many cases, the insurance company will also want to see pay stubs, to help calculate year-to-date earnings. If you own your own business, the underwriter will also want to see business tax information.
For underwriting purposes, income is considered earned if a disability would stop or reduce it. Investment or business income that is not dependent on your ability to work will not be factored into your financial underwriting.
Where You Live
Where you live will greatly impact how much you pay for disability insurance. The difference could be as much as 30 percent. The variation in cost is based on three factors:
- State regulations. Some states have more regulation on insurance products than other states. This makes it more expensive for insurance companies to get products approved by a state’s insurance department.Carriers frequently limit the products they offer in states with strict regulations. Fewer carriers mean less competition which can also increase the cost.
- Claims history in states. Insurers also base their rates on the claims history in a particular region or state. The more disability claims an insurer experiences in an area, the more it will charge all customers in that area.
- Living costs and income levels. Disability insurance cost is based on the insured’s income. Therefore, states and regions where people earn more income and have higher costs of living make income replacement more expensive.
Disability Insurance Plan Options Affecting Cost
Other factors that affect premium costs are choices you make when selecting a policy. Insurance carriers offer options for some plan design features, including…
You can choose the length of time the policy will pay out benefits. The longer you receive payments, the more the policy will cost. Some policies pay a monthly benefit for a specific period, such as 10 years. Others pay until you reach a certain age. Most carriers offer a few options that’ll help you tailor the policy to your specific needs. Some may prefer a longer benefit period and feel the additional cost is worth extending coverage.
Disability insurance policies include a waiting period, which is sometimes called an elimination period or qualifying period. It’s the amount of time between when a disability occurs and when benefits will start being paid.
The elimination period for disability insurance is like the deductible on your auto insurance. It’s the part you pay out-of-pocket before payments start. The longer the waiting period on a disability insurance policy, the less you will pay in premium.