Disability insurance rates: The cost of long term insurance
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Long term disability income insurance is designed to protect your income if you cannot work due to illness or injury, and understanding the cost of disability insurance is crucial when considering long-term coverage. Yet, a common misconception about disability income insurance is that its sole purpose is to cover against catastrophic events resulting from accidents.
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In fact, illnesses like cancer, depression, and multiple sclerosis far more often impact your ability to work and support yourself and your family – only 12% of disabilities are caused by physical injuries.
Long term vs. short term disability insurance
The biggest difference between short term and long term disability insurance is the period of time you’ll receive benefits if you’re unable to work. This period is called the benefit period.
It is important to understand the different disability insurance policies available and how they can be tailored to individual needs.
As the name indicates, short term disability insurance is intended to cover you for a short period of time following an illness or injury that keeps you out of work. While policies vary, short term disability insurance typically covers you for a term somewhere between 13-26 weeks and can replace anywhere from 40-70% of your income during that benefit period.
On the other hand, long term disability is intended to provide benefits for a longer period, and benefit periods for long term disability insurance are usually stated in years: 5, 10, 20, or even until you reach retirement age, depending on your plan.
Suppose you have both short term and long term disability policies in place. In that case, short term disability will pay you benefits during the waiting period before your long term disability coverage begins. You’ll then transition from one policy to the next to receive benefits.
How much does long term disability insurance cost?
The cost of a disability policy – especially an individual policy – can vary greatly based on benefit length and amount, age, gender, occupation, and policy riders. One rule of thumb: expect to pay between 1 to 3 percent of your annual salary.
Premiums – the amount you (or your employer) pay for the policy – can range from $25 to $500, again depending on many factors particular to your situation. These premiums are calculated every month, and factors such as age, gender, occupation, benefit length, and policy riders significantly influence the monthly premiums you might incur. The benefit of an individual policy usually isn’t taxed (unless paid for with pre-tax dollars); for a group plan if paid in part by your employer, the benefit will be taxable.
The long answer is more complicated. We’ll explain below so you better understand what you’re buying.
Learn more about cost with our disability income insurance quote tool.
Factors that determine long-term disability costs
Premiums vary based on the length and type of coverage, your health, the benefit amount, and other factors. In this section, we’ll highlight how these factors may determine costs.
Age: The earlier you buy disability insurance, the lower your premium rates will be. That’s because as you age, your health declines and you become more likely to suffer a disability or illness. You can, however, lock in the rates for life when you purchase disability insurance when you’re healthy.
Gender: Men pay less than women for disability insurance, because more women file claims for pregnancy and mental health conditions. However, disability insurance rates increase at a faster rate for men than for women, with men paying about 50% higher rates at age 40 and 191% higher rates at age 60 than they would at age 24. 1
Occupation: Hazardous occupations, such as working with heavy equipment, might pay more than someone who sits at a desk all day.
Health: Your health also affects cost, as people with a history of disabling conditions such as back injuries, arthritis, and asthma could potentially pay higher premiums.
And optional factors that vary by person
Coverage amount: The amount you receive each month when you can’t work. It should be between 60 to 80 percent of your monthly salary. The benefit of an individual policy usually isn’t taxed (unless paid for with pre-tax dollars); for a group plan if paid in part by your employer, the benefit will be taxable.
Benefit period: The length of time you can receive benefits. For short term disability, this will typically not be more than a year; for long term disability, it could range from two years to retirement, or until you recover from your disability.
Waiting period: Also called an elimination period, it’s the amount of time after you are disabled until you can start receiving benefits. It will generally be shorter for STD and longer for LTD.
Standard individual disability plan features offered by Guardian
Non-cancelable: To ensure your rates stay the same as you age and become less healthy, you need to lock in your rates. You can do this by purchasing a non-cancelable rider, which guarantees your rates on the policy as long as you keep paying the premiums.
True-Own Occupation definition of total disability: Provides you the ability to receive your full disability benefits, even if you’re gainfully employed in another occupation or capacity – with no reduction in benefits. Other optional definitions are available. Different levels of disability may also be defined (for example, “partial disability”), which can qualify you for various percentages of your total benefit amount.
Waiver of premium: Waiver of premium for disability is a provision in an insurance policy that states the insurance company will not require the insured to pay the premium if they are disabled and receiving benefits.
Hospice care benefit: If you’re admitted into a qualified hospice program, you’ll be considered totally disabled (eligible for benefits). The policy elimination period will often be waived so you can receive benefits sooner.
Unemployment premium suspension: Suspends premiums while you’re unemployed, allowing you to stop paying premiums but continue owning the policy. However, coverage is also suspended while unemployed, so if you become disabled during that time, you won’t receive a benefit.
Occupational rehabilitation and modification and access benefit endorsement: Helps pay for occupational rehabilitation expenses plus the cost of modification to your work environment to accommodate physical limitations.
Optional individual disability plan riders
Future purchase option 2 : This lets you increase coverage in the future as your income rises, without having to undergo a medical exam or provide proof of medical insurability.
Cost-of-living adjustment 3 (COLA): A policy rider that states the insurance company will increase your benefit to account for inflation.
Catastrophic disability benefits: Provides extra funds – up to 100% income replacement – if due to injury or sickness you are unable to perform two or more activities of daily living, are cognitively impaired or irrecoverably
Student loan protection rider 4 : This optional benefit provides extra money to make student loan payments during the benefit period. It is particularly useful for early-career professionals such as doctors and lawyers who have invested heavily in their education.
Retirement protection 5 : A rider that protects retirement savings by replacing the contributions you would have made to your defined contribution plan while totally disabled.
Unemployment waiver of premium: Waives your premiums while you’re unemployed, allowing you to stop paying premiums but continue owning the policy. You may remain eligible for disability benefits should you become disabled during that time, since your policy remains active.
Social insurance substitute: This monthly benefit coordinates with payments received under Social Security and some other government programs.
Where to get long term disability insurance
There are two potential ways to get a disability insurance policy:
1. Group disability insurance through your work or an association.
Your company may offer STD or LTD insurance as part of your employee benefit package. If you’re self-employed, you may be able to get disability insurance through a professional association. Either way, group disability insurance can be an excellent choice: Because the company or association is buying for a large group of people, the premium is typically lower than for an individual policy. In addition, your HR department (or the association’s management) will likely have more expertise and leverage to negotiate favorable terms.
An added benefit to getting a policy through your employer is that they may also subsidize a portion of the premiums, further lowering your cost. On the other hand, because the company or association is effectively “buying in bulk,” you will probably have less opportunity to tailor the policy to your needs. If the premiums are paid with pre-tax dollars (usually the case with employee benefits), then the income benefit you get down the road will typically be taxed. Finally, if you leave the company or association, in most cases you’ll also lose your coverage.
2. Individual disability insurance
This is typically a long term disability policy you purchase for yourself, so you can tailor it to your needs. As it’s usually paid for with after-tax dollars, the replacement income it provides is also tax-free. It’s most often bought through a financial professional; if you don’t have one, or if that person doesn’t have much experience with disability insurance, a Guardian financial professional can give you a disability insurance quote.
While Social Security Disability Insurance (SSDI) is available to many workers, it has a narrow definition of disability, often resulting in a high rate of claim rejections and providing inadequate financial support for those who qualify. Therefore, individual policies might be necessary for better coverage.
Curious about the role of disability insurance in financial wellness? Learn more