Disability insurance is the only type of coverage that protects your most valuable asset – your income. With the advent of search engines, shopping for disability insurance has become as easy as shopping for anything else. You can simply go to any number of insurance websites, plug in some details about yourself, and start the process of getting some quotes. Some sites even provide instant disability insurance quotes, so you can get an approximate cost immediately and then request more information if you’re interested.
But, what goes into the pricing of a disability insurance policy, and in the end, is it worth it? That is a much deeper question and something that is harder to determine via an online quote calculator. The price of a disability insurance policy is a direct reflection of the features of the policy as well as the risk the insurance company perceives towards the insured. Let’s look at what goes into the numbers you see when you shop for a policy.
What’s in a Premium?
The price you pay for a disability insurance policy is called the premium. The premium is established through an assessment of the risk that the insurance company will have to pay a claim on the policy. The higher the risk, the higher the premium. So, what types of things increase risk to the insurance company?
There are some things you can control:
- Higher monthly benefits—It stands to reason that a policy paying $5,000 per month will have a higher premium than one paying $2,000 per month.
- Shorter elimination periods – The elimination period is how long you have to be out of work before being eligible for benefits to be paid. If you have a policy that provides benefits after only 30 days, that will be more expensive than one that provides benefits after 90 or 180 days.
- Longer benefit periods – The benefit period is how long you are eligible for benefits. If the insurance company knows they may have to pay you until age 65, they will charge you a higher premium than if they knew they might only have to pay for two years.
- Optional riders—A “rider” is a feature you can add to your policy for an increased premium. These provide more value to the coverage, such as cost-of-living increases, coverage for partial disabilities, and future increase options.
And, there are some things you can’t control:
- Your occupation – Jobs with higher levels of manual labor typically have higher premiums than “office jobs”. The risk of being unable to work outside with your hands is generally more substantial than someone who sits behind a desk all day.
- Your age and sex – Generally, the older we get, the more medical history we have, and the greater the chance that that medical history might keep us from working at some point. Sex also plays a role in the pricing of insurance policies. The claims experience of insurance companies for disability (called morbidity experience) is generally higher for females than it is for males. Incidentally, the opposite is true for life insurance where males are more expensive than females.
- Your health – Disability insurance is medically underwritten, so they do look at your health when assessing the risk. There are certain medical conditions that will increase the risk of a claim to be paid, and this can affect the cost of the coverage.
