Understanding the cost of disability insurance

Few people anticipate falling ill or getting injured and the consequences it can involve. Yet, a significant part of the population experiences a disabling event at some point in their lives—whether it's a brief setback or a condition that permanently affects work capabilities. In fact, data shows that 1 in 4 workers will experience a disability lasting longer than a year before reaching retirement age.

Disability income insurance can help protect your income when it's needed most. To plan for this coverage, you need to know the cost of disability insurance and if it's worth it in your situation.

Get a refresher on how disability insurance works

Premiums generally range from 1% to 4% of your annual income and are usually paid in monthly installments.^* Reviewing the average disability insurance cost per month can help you determine how this coverage might fit into your budget.

Here's what it could mean for your budget based on various annual income levels:

• $50,000 annually. Premiums between $42 and $167 monthly
• $75,000 annually. Premiums between $63 and $250 monthly
• $100,000 annually. Premiums between $83 and $333 monthly
• $150,000 annually. Premiums between $125 and $500 monthly
• $200,000 annually. Premiums between $167 and $667 monthly

These calculations provide only a basic estimate of the cost of disability insurance. Actual costs can vary greatly based on your circumstances and the contract specifics. Use these figures as a general guide, and get a personalized quote from a financial advisor for numbers fine-tuned for your situation.

The price you pay for disability insurance isn't one size fits all. Your income is typically the most important factor since it often drives the decision about the amount of coverage you'll need.

However, several other factors can influence your premiums, including:

• Benefit amount. The higher the percentage of your income you want to replace, the higher your premiums will be.
• Benefit period. This is how long you'll receive benefits if disabled. Disability contracts can feature short- or long-term coverage. Generally, longer benefit periods mean higher premiums.
• Waiting (or elimination) period: The time between your disability happening and when benefits begin is the waiting period. Choosing a longer waiting or elimination period lowers your premiums.
• Age: Typically, the younger you are when you buy insurance, the lower your rates. Older people often see higher rates.
• Health: Your current health and medical history can impact your rates. If you are a smoker or have other conditions that may lead to disability, you may pay more later on.
• Occupation: Riskier jobs often lead to higher premiums. If your occupation is more dangerous, you'll probably face higher premiums or potentially not be insurable.
• Hobbies: Participating in high-risk hobbies such as skydiving, extreme sports or mountain climbing may lead to increased costs or not be insurable.
• Gender: Women tend to pay more than men for comparable coverage. Insurers have found women tend to leave the workforce due to disability more often than men.
• Definition of disability: Own occupation disability, which means you're unable to do your specific job, typically costs more than any occupation disability in which you can't do any job.
  

Riders are optional additions to your disability insurance contract, offering extra benefits or flexibility. Adding different riders to your benefit often allows you to customize your coverage. They usually increase your premiums but sometimes can be worth the extra cost, depending on your budget and needs.

Here's a quick overview of three common disability insurance riders:

A residual disability rider provides income if you can't work because of an injury or illness but don't meet the requirements for total disability. It can act as a safety net, protecting your income and allowing you to cover the financial needs of your loved ones.

A future purchase rider (FPO) lets you increase your coverage every few years without needing another medical exam, allowing you to increase your contract if needed. It's valuable if your income and expenses grow over time.

The disability waiver of premium rider is often added to life insurance coverage. If you become disabled, it waives your regular premium payments, keeping your life insurance in force with no reduction of benefits. However, with this rider, you usually have to add it when buying your life insurance contract.

Deciding if disability insurance is worth it depends on a variety of factors, including your financial situation, dependents, budget and risk tolerance. If you rely on your income to cover essential expenses, have limited savings or work in a physically demanding or dangerous job, disability insurance can provide financial protection for your family.

However, even those with secure jobs or substantial savings could benefit from the financial protection it offers.

Consider asking a few key questions:

• How much emergency savings do I have? If you suddenly couldn't work, would your emergency funds cover your living expenses for an extended period, upwards of six to 12 months, for example?
• What are my debts and financial obligations? While daily living expenses are important, also consider outstanding loans, credit card debt and future financial goals like retirement savings.
• What is my occupation? Some jobs carry a higher risk of injury or disability than others due to the physical demands and potential hazards.
• Do I have dependents? If you have loved ones who rely on your income for their well-being, you may need to consider how to provide for them if you can't work.
• What is my risk tolerance? Everyone has different comfort levels with risk, and your risk tolerance can factor into determining your insurance strategy.

Carefully considering your answers to these questions can help you make a more informed decision about whether disability insurance is a worthwhile investment for your family.

While disability insurance helps provide another layer of financial security, it's understandable to want to keep costs manageable as you're determining the coverage you need. Several strategies can help you strike a balance between protection and affordability.

For example, buying coverage early when you're young and healthy can help keep premiums down. You also may consider a longer elimination period — a longer wait means lower premiums. But, if you choose this coverage, ensure you have enough savings in your emergency fund to help cover the gap in income if a disability occurs.

Additionally, if you own a small business, you may be able to have your business pay the premiums as well as deduct them as a way to manage costs.

Finally, consider customizing your benefit amount and benefit period. Choosing a slightly smaller monthly benefit amount or a shorter coverage period can help reduce costs.