Consumer Guide to Disability Income Insurance

How much does Disability Insurance Cost?

Perhaps, more than most other type of insurance, disability-income insurance has a variety of factors which influence the final premium. Each of the following factors will determine the actual cost:

Age: The older the applicant, the higher the premium will be. The minimum age for applying is 18 and the maximum age is usually 60.

Sex: Unlike life insurance, female rates are higher per unit of coverage than those for male applicants.

Smoker vs. Non-smoker: Those who smoke can expect to pay as much a 25 percent more for the same protection as a non-smoker.

Benefit Amount: Disability policies are typically issued with a specific monthly benefit amount, e.g., $3000/month. Unless specifically stated in the policy language, these policies do not coordinate with Social Security benefits (they pay in addition to the Social Security benefit, which usually takes a long time to get paid, if ever). As benefit amounts increase, premiums increase accordingly. Most disability companies will not issue policies with benefit amounts of more than 60 percent of an individual's gross income.

Benefit Period: Disability policies can be written to accommodate various benefit periods. Typically, most companies offering this type of coverage provide two-, three-, five- and 10-year benefit periods. In addition, there are longer benefit periods such as “to the age of 65, 66 and 67,” which are designed to coincide with the implementation of full Social Security benefits. Some older plans offered lifetime benefits, but it is hard to find those plans today. The longer the benefit period, the higher the cost will be.

Elimination Period: Sometimes this factor is referred to as the “waiting period.” It refers to the period of time before benefits are paid. Most commonly, these periods are 30, 60 or 90 days. Waiting periods of 180 and 365 days are also available. The cost per unit of coverage decreases as the elimination period increases.

Occupational Class: Most disability companies have four, five or six occupational classes into which each applicant is assigned. Those who are in professional occupations (i.e., attorneys, CPAs and architects) will be placed in the highest classification and, therefore, will have a lower cost per unit of coverage. The physician classification will vary by carrier – some rate them at the highest classification, while others place them a notch or two below the top class. Conversely, an applicant in a blue-collar-type job will pay more per unit of coverage. All companies offering disability insurance use occupation manuals to determine the class into which an applicant will fall. The majority of these classifications are based on the carrier’s claim experience for these job categories.

Benefit Features:
Some companies offer policies that are self-contained, meaning that the pricing is based on all the benefit features included in the policy. On the other hand, there are companies that will let you build your own policy to suit your needs and affordability. In this case, various benefit features (such as a better definition of disability) will be listed separately, as will their respective cost. This allows you to add or delete a feature based on need and/or cost.

Ratings: Some applicants may have a pre-existing health problem that may cause the insuring company to place an extra rating on the policy. This is to protect the company against the extra risk it is assuming. These ratings can range from 25 to 100 percent.

Given that there are so many different factors influencing the rate for any one individual, it is little wonder that there is no simple answer to the question of “How much does disability income insurance cost?” However, as a general rule, you should plan on premiums being in the 1.5 to 3 percent of gross income range.

But the true cost of disability income insurance lies in the value of the product and the total benefit that may be available. For example, calculate what the total monthly benefit will be if you were to purchase a policy tomorrow and go on claim the very next month. The figure will be very significant – perhaps into the millions. Then calculate the first annual premium for all coverage and divide it by that significant total benefit and you get a "tiny" cost that will be less than most term life insurance premiums per $1,000 of death benefit. Remember, you could pay the first premium on your disability income plan and a few months from your purchase date suffer a serious and totally disabling condition for the balance of your life (or at least to age 65). Individual DI is the basis for a financially secure future!

What should I know before purchasing Disability Income Insurance?

Questions You Should Ask Your Health Insurance Agent about Disability Insurance:
Q. What benefit amount do I qualify for based on my current my income?
A. Your benefit amount is based on a percentage of your income. Typically this will be in the 60% range of adjusted gross income and can be a tax-free benefit.

Q. What is the elimination (waiting) period? What is the difference in cost by shortening or lengthening that period?

A. The elimination period refers to the length of time you must be disabled before benefits begin. It can be 30, 60, 90, 180 or 365 days. The longer the elimination period, the lower the cost will be. One point to keep in mind is that individual DI policies usually pay the claimant at the end of each month – so if you have a 90-day elimination period, you will not receive your first claim check until the 120th day (or around this time).

Q. What is the benefit period?
A. The benefit period refers to the length of time that the benefit is paid once you have satisfied the elimination period and are on claim. Policies commonly pay for two, five or 10 years and to age 65, 66 or 67. Obviously, the longer the benefit period, the higher the cost will be.

Q. Does my benefit coordinate with other insurance benefits (such as workers comp or Social Security)?
A. Many individual policies do not coordinate with workers compensation or Social Security. These policies are generally offered to mostly white-collar-type occupations and more highly compensated individuals. In other occupations, and in most group disability insurance, there may be coordination with other disability benefits. This has the positive effect of lowering premiums.
Q. What is the definition of disability in the contract? Does this definition change after a period of time?
A. The definition of disability is one of the most important elements in the policy. Definitions vary from each disability company, and sometimes even within the same company. There are definitions that cover specific job duties, any job duties, or loss of income only. Consequently, it is essential that you seek the advice of a professional DI advisor to guide you through the variations and the potential positive and negative features.

Q. Do I need to be totally disabled to receive a benefit, or does my policy contain a partial benefit provision?
A. Many of the quality individual disability policies on the market today provide for Residual, or partial, disability benefits. Sometimes this feature is included in the policy; in others, it is added by rider. In both instances, the plans provide that a proportionate benefit is paid based on a percentage of your loss of income. For example, a 50% loss of income during a partial disability would result in a benefit of 50% of your regular monthly benefit. The residual-type benefit is usually paid to age 65 as long as the insured continues to sustain an income loss.

Q. What optional benefits are available to me?
A. Many companies offer an array of options that can be added to the policy. Each of these additional features will have its own cost. This approach offers great flexibility in designing a plan to suit your particular needs. Some of the optional features are the aforementioned residual rider, an own-occupation rider (enhances the definition of disability in the policy), a non-cancelable rider (provides for level premiums during the duration of the policy), a future purchase option rider (guarantees your right to purchase additional amount of protection without evidence of medical insurability) and cost of living rider (designed to protect your benefit from the erosion of inflation).

Q. What is the rating of the carrier?
A. There are various rating agencies that are independent and that assign ratings to insurance companies based on an in-depth study of their operations and financial stability. Some of the more widely known agencies are A.M. Best, Standard & Poor’s, Fitch and Moody’s. The rating is typically assigned in the form of letters, e.g., AAA or A+. Each company’s website will have a link to its ratings.

Financially sound companies are an important factor in deciding the company with which you chose to do business.

Q. What is the reputation of the carrier as it relates to paying claims?
A. Since this is a subjective question, we recommend checking with your state Department of Insurance for the complaint record of a particular company you are considering. Most Departments of Insurance keep records of this type and it is considered public information.

Q. What occupational classification have I been placed into? Can this change if I change occupations?
A. The nature of the work you do is a critical factor in determining the premium you will pay for your policy. Those engaged in manual labor will pay higher premiums for each unit of coverage than those in professional careers and administrative-type work.

Each company maintains an occupational manual into which they have listed many different occupations. Based on this listing, an occupation code will be assigned to that individual and the subsequent rate will be determined accordingly. Once an individual policy is issued, the company cannot change the classification. If you move to a less risk-oriented occupation, you can apply for a classification change and, possibly, a reduction in premium.

Q. How long will it take to get a policy issued?
A. The length of time for the issue of a policy will vary depending on the number and nature of additional requirements for that particular case. Companies may wish to acquire medical records for previous medical issues and sometimes this process can take many weeks. Generally, you can expect a disability policy to be issued within four to six weeks.

Q. What exclusions are in my policy?
A. Exclusions in disability policies are those situations or events under which the policy will not pay a claim, and are usually few in number. Most often the exclusions apply to disabilities arising as a result of a crime, self-inflicted injuries, war or military action. Be sure to check any DI proposal for these exclusions so you are fully informed as to what is not covered.

What are the types of Disability Insurance policies?

There are several types of disability policies that are available; they each have their own unique characteristics and pricing. Here are the most common:
Guaranteed Renewable: These policies contain provisions that guarantee that the policies will be renewed by the insuring company for the benefit period for which the policy has been issued. For example, a policy issued with a benefit period of "to age 65" will be renewed at least to age 65, provided the premiums are paid in a timely manner. This means that the insuring company can make no changes in the policy after issue and only the insured has the right to terminate the policy. The rates for these policies may be increased, but only if done so on all policies in that class within the state of residence. In other words, an individual may not be singled out for a rate increase. Some companies guarantee the rate for the first three years of the policy.
Non-Cancelable: The renewal provisions for this type of policy are very similar to the guaranteed-renewable policy, except that the premium for the non-can policy cannot be changed during the renewal period, which is typically "to age 65." Premiums for this type of policy will be higher than guaranteed-renewable policies.

Optionally Renewable: Rarely seen any more, these policies were made available quite a few years ago. They can be terminated by the issuing company and, while low in cost, should be avoided for the obvious reason of the vulnerability of the insured.

Group Long- and Short-Term Disability Plans:
These are most frequently found in employer-employee business environments and, in many cases, are paid either in full or in part by the employer. The short-term plans are typically written with shorter elimination periods (such as seven, 15 or 30 days) and no more than a 13- or 26-week benefit period. The long-term plans are typically written with a 30-day or longer elimination period, and range from a two-year benefit period all the way “to age 65” (which is the most frequently seen benefit period). There are usually very few optional benefits available with these types of plans. In a growing number of circumstances, these plans can be voluntary, in which case the employee pays all or a large portion of the premium.

Voluntary Job-Site Disability Plans: The majority of these plans are offered through an employer but paid for by the employee. Typically, there is a short presentation and employee enrollment on the job site. The benefit periods are typically shorter in duration, although some plans are now offering longer benefit periods. While low in cost, benefit amounts are normally less than that offered through individual policies. As an economical alternative to other, higher-priced individual plans, these plans may be a good choice for hourly workers.

What is Disability Income Insurance?

Disability Insurance is the industry name for a plan that provides for periodic payments of benefits when a disabled insured is unable to work. The insurance product is designed to replace anywhere from 45 to 65% of your gross income on a tax-free basis should illness keep you from earning an income in your occupation. Every disability policy is different and should be assessed by the consumer based on the quality of plan created for the individual’s needs and not by the cheapest disability insurance policy on the market. Many consumers do not plan for the possibility that they will be faced with a debilitating accident or illness during their working years. A professional with a family, for example, should consider disability insurance a necessity. For a consumer, it is not a required purchase like home owner’s insurance. Individuals believe they may have disability coverage through their employer. This at times may be true, but the quality of coverage often leaves the disabled employee short of the protection he/she thought they had. A qualified insurance agent can assist the consumer with exploring the sources of income the consumer will need and have available during a disability.

Additional Resources

America's Health Insurance Plans: Guide to Disability Income Insurance

Social Security Disability Program Guide: Pays benefits to you and certain members of your family if you are "insured," meaning that you worked long enough and paid Social Security taxes.

Disability Service Improvement - View the final rule here.

National Institute on Aging: Resource List - Legal and Financial Issues

National Alliance for Caregiving - Dedicated to providing support to family caregivers and the professionals who help them and to increasing public awareness of issues facing family caregivers. At least 44.4 million adults provide the care that is so critical in helping friends and loved ones with debilitating illnesses remain in their homes and other community settings.

Disability Income Primer – Archive of the NAHU webcast program

Disability Insurance Forums - Most comprehensive source of DI information on the web.

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