The cost of disability insurance

There are a lot of factors to take into consideration when calculating the cost of disability insurance, but the general guideline is that you can expect to pay between 1% and 4% of your yearly income in premiums per year¹. When this is compared to the loss of income from a long-term injury or illness, it makes considerable financial sense.

Is long-term disability insurance worth the cost?

You have insurance on your car. You have insurance on your house. These items are valuable, and it’s important to make sure your investment in them is protected. But many people forget about their most important asset—their ability to work and earn an income. Injuries, chronic pain, and sicknesses like cancer afflict people every day, and often can take them away from work for significant periods. What would you do if you had to manage without your income for six months? What about a year or more? That’s why it’s important to consider long-term disability insurance as part of your financial protection plan.

While we all prefer to think that we will never be faced with disabilities, they are quite common, and when they hit, they can have a significant effect on a person’s life, family, and future. Balancing this risk is a key part of every family’s financial protection plan.

1 in 4 of today’s 20-year-olds will experience a disability lasting a year or more

Disability is not just about workplace accidents. In fact, a large majority of claims are from common sicknesses  like cancer and diabetes, or severe pain (particularly hip and back pain). Millions of people lose work time to these and similar issues every year. More than one in four people who are now at the beginning of their careers are expected to be out of work because of a disabling condition for at least a year before they reach their normal retirement age.³ 

Related: What does disability insurance cover?

68% are unprepared for even short-term income loss

Most Americans have never considered what it would be like to miss a year’s worth of paychecks or more. In fact, more than two-thirds would have trouble paying basic expenses, like a mortgage (or rent), utility bills, and groceries if their next paycheck were delayed by just one week.⁴

The average long-term disability claim is nearly three years⁵

Many of the issues that commonly cause disabilities are not short-term. Some last a lifetime. Think about the next three years. What would happen if you were unable to work? If you are not protected, your life could be turned upside down, and you might be forced to make major changes in your lifestyle or to return to work earlier than expected.

Government programs may not be enough

There are government disability programs like Social Security Disability Insurance (SSDI) that are available to most workers. However, SSDI defines “disability” narrowly. While there is no guaranteed approval with any disability insurance, a large majority of SSDI claims are rejected, and the people who do qualify see only an average of $1,277.05 per month, far below what most would consider adequate replacement income.⁶

What affects the average cost of long-term disability insurance?

There are a lot of factors that go into calculating how much individual long-term disability insurance costs per month. The best way to find out what you might pay is to speak with an agent. So, how much does long-term disability insurance cost? There are many options, which makes it hard to generalize, but on average, you can expect to pay 1% to 4% of your annual salary. Here’s what can affect your monthly premiums:

Your age, health, and medical history

As is the case with most insurance, risks have to be balanced, which means the older you are, the higher your premiums tend to be. Preexisting medical conditions will likely affect the cost of your policy. You will generally  get better long-term protection while you are young and healthy.

The length of the benefit period and the income replacement amount

Long-term disability insurance policies usually pay benefits for a specific number of years, like five, 10, or 20, or simply cover you up to a chosen retirement age. The longer the benefit period, the higher your disability insurance premiums will be. It’s smart to balance your future needs with what you can fit into your budget today. In addition, you can choose to cover anywhere from 40% to 70% of your income. If you can get by with receiving less per month, this is a way to lower the cost of disability insurance.

The elimination period

This is the total number of days you must be disabled before you can start collecting long-term disability insurance benefits. They don’t have to happen in consecutive order, but need to add up within a given period, called the accumulation period. Often, long-term disability insurance elimination periods coincide with the end of any short-term disability coverage you may have through your employer. The elimination period can be anywhere from a month to two years or more. Larger elimination periods will result in lower disability insurance premiums.

Any-occupation vs. own-occupation

Individual disability insurance policies can have different definitions of what constitutes a disability that prevents you from working. Some policies offer “own occupation” coverage, which will pay benefits for as long as you are disabled and are unable to perform the duties of your “own occupation.” “Any occupation” coverage pays benefits if you are disabled and cannot perform the duties required in any occupation for which you are qualified by reason of your education, training, and background. Some polices may have an “own occupation” standard that changes to an “any occupation” standard after two years of benefit payments.

Other factors and customization

Many individual disability insurance policies are customizable to fit your exact needs. Since everyone’s situation is different, this can give additional financial protection, particularly when these policies are compared with employee-sponsored group policies that provide very few options. These customizations (some at additional cost) are called “riders” and can increase or decrease your average benefits. One common rider is a Cost of Living adjustment, so your benefits stay in sync with inflation.

Examples of disability insurance premiums

What’s best for you might not be best for a relative or friend. Everyone must weigh the pros and cons of various parts of a long-term disability policy. Here are some generalized scenarios that may help add context to your decisions.

Richard, a 35-year-old male working in a professional job, would like to make sure his family’s lifestyle is protected should he not be able to work for an extended period. He’s torn between two significantly different policies. One is a policy that protects him with two years of disability benefit payments and has a 90-day elimination period. Its premium is modest. The other provides disability benefits up to his retirement age of 67 in the event of disability. It has a 180-day elimination period and costs roughly 50% more. Which should he choose? The lower premium may be enticing, but with only two years of coverage, there is a chance of significant loss should Richard not be able to work for longer than that. The average claim is for around three years, so this is a common occurrence. If the family can get by during the 180-day elimination period of the second option, it could provide more value should Richard be unable to work for a long period or potentially even permanently. Of course, you should consider your situation in thinking about coverage. Read more about this scenario.

Protection for peak earning years

What if Richard was 45? How would that change things? Generally, people make their highest salaries while they are in their 40s and 50s. While disability insurance premiums rise with age, since claims are more common for older workers, earnings during these years are often relied upon to build a retirement nest egg, so it’s particularly important that they be protected. In this scenario, the trade-off is between coverage length, elimination period, and premium change. It’s actually cheaper for Richard to purchase a plan that protects him up to his retirement age with a longer elimination period than it is for him to get a shorter, five-year policy with a 90-day elimination period. The longer protection can make a significant difference in Richard’s lifetime earning potential should something happen. Read more about this scenario.

How do I get disability insurance?

If you’re interested in learning more about disability insurance, your next step is to chat with a qualified agent. There’s no commitment to buy, and an agent can help you customize your policy, explain all the terms, and give you multiple options for different premiums. 

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