For those who understand what disability insurance is and how it works, the biggest question is: How much does disability insurance cost and is it worth it?
The average cost of disability insurance is typically between 1 percent and 4 percent of your annual income. Another rule of thumb is that you should expect to pay between 2 percent and 6 percent of your policy’s monthly benefit amount in premium.
In this article, we cover all of the factors that determine disability insurance cost, including:
- How your job impacts the cost of disability insurance
- How personal factors impact the cost of disability insurance
- How policy choices impact the cost of disability insurance
- How much should I pay for disability insurance?
Read on to learn more.
Disability insurance cost based on job occupation
How much you will pay for disability insurance heavily depends on what you do to earn a living.
To determine the pricing and benefits of policies, disability insurance companies group jobs into specific occupational classes. These classes take into account the hazards of the job. Another factor is the claim experience associated with certain professions.
Insurance companies generally classify occupations on a scale of 1 to 5 or 6. Typically, the higher the number the lower the rate available from the insurance company.
Insurance companies also have to assess jobs based on the difficulty in returning to work following a disability. That’s because certain disabilities would hinder the ability to do some jobs, but not others.
The following two charts show the difference in premium costs for a 40-year-old earning $65,000 a year getting benefits for five years, based on four classes of occupation:
- Light labor is a skilled manual job in lighter industries such as auto mechanic, carpenter or landscaper.
- Labor is defined as heavier or unskilled manual jobs with more hazards, such as a bus driver, roofer or builder.
|Gender and Profession||Premium for $800 monthly benefit||Premium for $1,500 monthly benefit||Premium for $2,270 monthly benefit|
|Light Labor Male||$23||$38||$58|
|Light Labor Female||$29||$49||$74|
- Professional is defined as an office job with few hazards, such as an accountant or software engineer.
- Technical is similar to professional with some hazards, such as a salesperson or lab tech.
|Gender and Profession||Premium for $1,100 monthly benefit||Premium for $2,000 monthly benefit||Premium for $3,300 monthly benefit|
Disability insurance cost based on personal factors
In addition to your job occupation, the cost of disability insurance also depends on a number of personal factors, including your age, gender, and health history.
Cost of disability insurance by age
When it comes to the cost of your policy, your age is one of the biggest determining factors. Because you’re more likely to become disabled as you get older, disability insurance is more costly as you age. Some estimate that comparable policies can increase in cost up to 5 percent a year as a person ages. Therefore, it’s best to purchase when you’re younger in order to obtain the lowest rates.
Here is an illustration of how much more you will pay the longer you wait to buy coverage. The following rates are for different aged men with technical jobs making $85,000 a year. Each policy is for a $4,300 monthly benefit that lasts for five years.
- A 40-year-old will pay $82 a month
- A 45-year-old will pay $104 a month
- A 50-year-old will pay $129 a month
- A 55-year-old will pay $167 a month
The older you are, the more you will pay for coverage.
Cost of disability insurance by gender
Disability insurance costs more for women than men (which is the exact opposite of life insurance).
All other factors being equal, women can pay up to 40 percent higher premiums than men for disability insurance. That’s because women suffer disabilities that impact their careers, such as breast cancer, autoimmune disorders, and depression, more than men. Disability claims for women also typically last longer than those for men.
In the two charts in the occupation section above, with all other factors being equal, women were quoted rates between 25 percent and 33 percent more.
Cost of disability insurance by health
Your health history will also impact your premium rates, for better or worse.
Insurers will assess your current health. The healthier you are, the less likely you are to become disabled, and vice versa.
During the underwriting process, you will be asked about your family's medical history, pre-existing health conditions, and medications you’re taking.
You will also likely have to submit to a paramedical exam. The exam is similar to a physical checkup. A technician will record your height, weight, body mass index, pulse, and blood pressure. Anything that is above the normal, such as being overweight or having high blood pressure, will adversely affect your rates. The examiner will also collect blood and urine.
It’s well known that tobacco has a negative effect on health. Conditions caused by long-term tobacco use, such as emphysema and cancer, can lead to long-term disabilities. As such, disability insurers will typically charge more to applicants with a history of tobacco use.
The following price quotes show that nicotine or tobacco use can raise your disability insurance rates 18 to 20 percent.
This chart includes quotes for 50-year-olds with technical jobs earning $85,000 a year:
|Gender and Tobacco Use||Premium for $1,500 monthly benefit||Premium for $2,900 monthly benefit||Premium for $4,300 monthly benefit|
|Male No Tobacco Use||$39||$81||$129|
|Male Tobacco Use||$46||$96||$154|
|Female No Tobacco Use||$49||$102||$164|
|Female Tobacco Use||$58||$122||$196|
Cost of disability insurance by location
Did you know certain geographic locations have higher disability rates than others?
The claims history of some states may determine the risk its residents pose to insurance companies. Therefore, residents of certain states like California that have more disability insurance claims will pay higher rates than less populated states like Wyoming.
For example, a 50-year female technical worker making $100,000 will pay $162 a month for a $5,000 monthly benefit that lasts five years in many parts of the country.
However, in Los Angeles, California, that same applicant would pay $199 a month, about 23 percent more.
Disability insurance cost based on policy choices
The features and benefits you elect will impact the cost of your disability insurance policy. Those decisions include:
- Your benefit amount
- Your benefit period
- Your elimination period
- Any additional riders you select
Cost of disability insurance by benefit amount
When making coverage decisions, you will have to weigh the premium cost with how much you would need to live on in the event of a disability. The more your policy pays in monthly benefits, the more you will pay in premium.
Keep in mind that disability insurance payments are tax-free. Therefore, if your benefit amount equals around 60 percent of your pre-tax income, you should collect close to your take-home pay in disability payments.
Here’s an example of how much your benefit amount can impact your premium. These rates are for a 40-year-old male laborer earning $50,000 a year. The monthly premium rates quoted are:
- $26 for a $700 monthly benefit
- $43 for a $1,300 monthly benefit
- $59 for an $1,830 monthly benefit
The higher your benefit amount is, the higher your premiums will be.
Cost of disability insurance by benefit period
You can choose the length of time a disability policy pays benefits. The longer you receive payments, the more you pay in premium. Some policies will pay a monthly benefit for a pre-established period, such as 10 years. Others will pay until you reach a certain age, typically 65. A few insurance companies have an option that pays lifetime benefits if the insured remains disabled for life.
Here’s an example of how much your benefit period will impact your premium. These rates are for a 45-year-old male professional worker earning $75,000 a year. This applicant is opting for a $3,800 monthly benefit. The monthly premium rates quoted are:
- 1-year benefit period: $46
- 2-year benefit period: $56
- 5-year benefit period: $73
- 10-year benefit period: $86
- To age 65: $97
- To age 67: $107
The longer your benefit period is, the higher your premiums will be.
Cost of disability insurance by elimination period
Also known as the waiting period, this is the period of time between when the disability occurs and when benefits begin to payout. For example, a policy with a 60-day waiting period would not pay benefits for the first 60 days after the insured becomes disabled.
The longer the elimination period on your disability insurance policy, the less you will pay in premium. Thirty-day elimination periods are more expensive than 60-day periods, which cost more than 90-day periods.
Here’s an example of how much your elimination period will impact your premium. These rates are for a 45-year-old female professional worker earning $75,000 a year. This applicant is opting for a $3,800 monthly benefit. The monthly premium rates quoted are:
- 30-day: $203
- 60-day: $133
- 90-day: $98
- 180-day: $88
- 365-day: $81
As these figures show, there is a considerable difference between 30-day and 60-day elimination periods. There’s also a 36 percent difference between a 60-day and 90-day elimination period.
However, there’s a much slimmer margin between a 90-day and a 180-day period. That’s why most experts recommend 90 days. It may not be worth the higher premium to get a 60-day period. But it is worth the few extra dollars a month to get three extra months of disability coverage in the event you lose your ability to work.
Cost of disability insurance by riders
Disability insurance policies typically offer optional features. These benefits are often called riders. They are designed to enhance your disability coverage. Riders help customize a policy to fit your needs and preferences.
By adding features, you will also be adding to the cost of your disability insurance policy.
Common disability insurance riders include:
Own-occupation. There are several ways a disability policy can define disability. The way your policy defines disability will determine how much, and even if, you collect benefits following an injury or illness.
An own-occupation policy protects your ability to work in your given profession. You will be covered if a disability prevents or limits you from working the job you had before your event. If you’re able to work in another capacity, you are still eligible for benefits.
This rider will ensure you receive benefits if an injury prevents you from working in your chosen profession. This includes scenarios in which you’re well enough to earn income doing other types of work. Without this provision, you may only collect benefits if you are unable to work in any capacity.
Residual disability. A residual disability rider can supplement the income of a disabled person who is still working and not considered to be totally disabled. Residual benefits are typically calculated as a percentage of both the policyholder’s loss of earnings and the benefit that the policyholder would receive if he or she was unable to work. It essentially makes up the difference between what you earned before disability and what you can earn with your disability.
Automatic Benefit Enhancement. You can elect this rider to keep your disability insurance benefit aligned with annual income increases. The premium on your base policy will increase along with the increase in the coverage amount.
Non-Cancelable Rider. This feature makes your policy and any attached riders non-cancelable. Non-cancelable means that the insurance company cannot change the policy or riders by increasing the premiums or canceling prior to termination.
Guaranteed Insurability Rider. This rider gives you the option to increase your base policy monthly benefit by purchasing additional amounts of insurance. Additional amounts will have the same benefit period and elimination period as the policy. Increases do not require evidence of insurability and are based on your current income and the issue and participation limits in effect on the option date. Premiums for the additional insurance will be based on your attained age and the current rates. You cannot exercise an option if disabled or receiving benefits.
The availability of these riders will vary based on the insurance company, your location, the benefit period selected and your occupation class.
Understanding the additional cost of riders
Here are a few examples of how much the above riders can add to the cost of your disability insurance policy.
A 45-year-old female, professional worker who earns $50,000 a year applies for a $2,500 monthly benefit for five years. Without any riders, the premium per month is quoted at $61. The premium with each rider would be:
- Automatic Benefit Increase Rider: $63
- Guaranteed Insurability Rider: $64
- Non cancellable rider: $67
- Own occupation rider: $66
- Residual disability benefit rider: $65
- All riders: $80
A 50-year-old male, technical worker who earns $100,000 a year applies for a $5,000 monthly benefit for five years. Without any riders, the premium per month is quoted at $153. The premium with each rider would be:
- Automatic Benefit Increase Rider: $162
- Guaranteed Insurability Rider: $164
- Non cancellable rider: $175
- Own occupation rider: $164
- Residual disability benefit rider: $167
- All riders: $220
A 40-year-old female light labor worker who earns $60,000 a year applies for a $2,200 monthly benefit for five years. Without any riders, the premium per month is quoted at $72. The applicant does not qualify for a non-cancellable rider or own-occupation rider. The premium with each rider would be:
- Automatic Benefit Increase Rider: $74
- Guaranteed Insurability Rider: $74
- Residual disability benefit rider: $74
- All riders: $78
A 55-year-old male labor worker who earns $70,000 a year applies for a $2,430 monthly benefit for five years. Without any riders, the premium per month is quoted at $145. The applicant can only qualify for the Automatic Benefit Increase and Guaranteed Insurability riders. The premium with these features would be:
- Automatic Benefit Increase Rider: $150
- Guaranteed Insurability Rider: $151
- Both riders: $155
How much should I pay for disability insurance?
You can minimize the cost you pay each month by applying young, living healthy, and carefully evaluating your coverage options. (That's why the best time to buy disability insurance is right now!)
When it comes time to evaluate the cost of your disability insurance options, remember the two rules of thumb:
- 1-4% of your annual income
- 2-6% of your policy's monthly benefit amount
If you can find coverage within these guidelines, that's great. And if you can't, that perfectly ok, too. Remember, these are just averages. For one reason or another, your coverage needs may fall outside of these general guidelines. Don't let this deter you from accepting an offer for coverage.
After all, disability insurance may be the only thing that allows you to maintain your lifestyle in the event of a disability. Think about your house and your car. Not to mention the ability to eat out, take vacations, and pay for that Amazon Prime subscription.
So, what's your lifestyle worth to you?
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.