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Your ability to earn a living is one of your greatest assets. But what if you cannot work indefinitely because of a sudden disability?
That’s where a disability insurance plan can help you. It’s intended to preserve your income if you cannot work due to injury or illness.
But you might be wondering: how much does disability insurance cost?
In this post, you will learn about the factors that affect the cost of disability insurance. By the end, you’ll know how to find a policy within your budget to protect your earning power.
- Key takeaways:
- You can get short-term and long-term disability insurance through your employer, the government, or an individual plan.
- The cost depends on many personal factors like your age, gender, and occupation.
- How you customize your policy, including the benefit amount, waiting period, and riders, also affect the premiums.
Types Of Disability Insurance
Before discussing the cost of disability insurance, you should know about the two main types of coverage you can get.
Short-term disability insurance (STD)
As the name suggests, STD insurance protects you for a limited time if an illness or injury prevents you from working. While policies differ, it usually covers you for a period of 13 to 26 weeks, replacing 40 to 70 percent of your income during that time.
Long-term disability insurance (LTD)
On the other hand, LTD is designed to offer benefits for a more extended period of time if a disability prevents you from working. Benefit periods are frequently mentioned in years: 2, 5, or even to age 65, depending on your plan.
If you have both short- and long-term disability policies, insurance providers will first pay you short-term disability benefits. At the same time, you wait for your long-term disability payments to start. After STD benefits end, LTD benefits begin to continue to receive benefits.
The most significant distinction between short and long-term disability insurance is the length of time you can receive benefits if you’re unable to work.
How Can You Get Disability Insurance?
When it comes to income protection, you can get it from many different sources. The three main sources are group policies, individual policies, or government plans. Each plan has its advantages and disadvantages.
Group policy
This is where you get disability protection through your workplace or association. With group LTD, your employer chooses the plan design, such as the benefit amount and waiting period.
If your employer pays the premium, the monthly benefit will be taxable. It can then deduct the premiums from its taxes. On the flip side, if you pay the premium, you will receive the benefit tax-free.
Individual policy
Because you pay for the disability policy yourself, you have the freedom of customizing the policy to your liking. Also, because you pay the cost of insurance with after-tax dollars, you will receive the monthly benefit tax-free.
Government plans
If you become disabled, the government will take care of you—to a certain extent. You’ll have access to one of the three main plans:
Employment Insurance (EI) sickness benefits: You get taxable short-term benefits of up to $595/week for up to 15 weeks. You pay the EI premiums through payroll deductions.
Canada Pension Plan (CPP) disability benefits: You get up to $1,413/month of taxable benefits until age 65 if your disability lasts that long. Like EI, you pay for CPP benefits via payroll deductions. However, if you are self-employed, you have to pay both the employee and employer portions of the contribution.
Workers Compensation: This is a provincial income protection plan that covers workplace accidents. Each province has its own benefit amounts and periods. Because your employer funds this, you don’t have to worry about paying for it personally.
Personal Factors That Affect The Cost Of Disability Insurance
Now that you know about the types and sources of disability protection, let’s explore factors that affect how much it costs. Some of the ones that influence it the most are personal factors like age, gender, smoking status, and occupation.
Cost of disability insurance based on age
Because your chance of getting hurt or sick grows as you get older, your insurance premiums will rise as well. However, by purchasing insurance when you’re young, you lock in a lower rate for the rest of your working life.
Here is what the monthly cost looks like for a male non-smoker buying $3,000 monthly benefit:
| Age | Monthly premium |
|---|---|
| 25 | $45.74 |
| 30 | $48.01 |
| 35 | $52.60 |
| 40 | $61.97 |
| 45 | $75.28 |
| 50 | $96.07 |
| 55 | $124.80 |
| 60 | $190.41 |
Cost of disability insurance based on gender
Unlike life insurance, women pay more than men for disability coverage. That’s because statistics show that women have a higher chance of getting a disability than men.
The difference between the two genders is larger at younger ages. As the age goes up, the gap in cost between the two genders shrinks.
For example, a 35-year-old woman may pay 60% more for coverage than a 35-year-old man, while a 55-year-old woman may only pay 25% more for the same coverage than a 55-year-old man.
Cost of disability insurance based on smoking status
Smokers have an increased risk of becoming disabled. Like with life insurance, you can expect to pay more for disability protection if you’re a smoker. In most cases, this extra cost is between 20-40% more.
Cost of disability insurance based on occupation
The risks of your job also influence your insurance premiums. For example, jobs that are more laborious or dangerous have a higher chance of a disability occurring. As a result, these occupations are more expensive to insure.
Insurance companies rank your occupation with a lettering system. Occupation class 4A is the lowest risk and has the most affordable rates. For example, a physician or accountant would fall under 4A.
The risk increases from 4A to 3A to 2A to A, with the highest risk being class B. For example, waiters, ambulance drivers, and firefighters would fall under class B and pay the highest premiums.
Here’s a table showing the monthly cost for a 35-year-old male non-smoker with different occupation classes:
| Occupation class | Monthly premium |
|---|---|
| 4A | $52.60 |
| 3A | $65.24 |
| 2A | $83.35 |
| A | $106.09 |
| B | $133.74 |
Disability Insurance Cost Based On Policy Choice
In addition to your personal factors, the policy choice plays a large part in determining the cost of your income protection.
Cost of disability insurance based on the benefit amount
In general, you can buy enough benefits to cover between 50-80% of your pre-tax net income, not your take-home pay. The higher the percentage you choose to cover, the higher your premiums. You can use a disability insurance calculator to quickly figure out how much coverage you need.
Although you can choose a lower coverage amount, you should only consider this option if it can still cover your expenses. For most people, this means they should buy as much coverage as they can.
Here’s a table showing the monthly premium for a 35-year-old male non-smoker based on the monthly benefit:
| Benefit amount | Monthly premium |
|---|---|
| $1,500 | $28.80 |
| $3,000 | $52.60 |
| $5,000 | $84.34 |
| $7,500 | $124 |
| $10,000 | $163.67 |
Cost of disability insurance based on the benefit period
When you buy disability insurance, you can choose a benefit period. This is the amount of time you can claim for disability insurance payments while you are unable to work. The shortest is usually 2 years, while the longest is to age 65. Obviously, the longer you choose to receive payments, the higher the cost.
Because some disabilities can last a lifetime, we suggest choosing the longest benefit period possible. While you might save a few bucks with a shorter benefit period, you risk major financial consequences if you end up with a long-term disability.
Here’s an example of the monthly cost for a 35-year-old male non-smoker buying a monthly benefit of $3,000 with different benefit periods:
| Benefit period | Monthly premium |
|---|---|
| 2 years | $24.52 |
| 5 years | $32.19 |
| 10 years | $43.48 |
| To age 65 | $52.60 |
Cost of disability insurance based on the waiting period
After an injury or sickness, income protection policies have a waiting period before you can collect the benefit. Also called the elimination period, it’s a time-based deductible rather than a monetary one.
Waiting periods for short-term disability insurance might range from a few days to weeks. But with LTD insurance, you could be waiting up to two years before benefits begin. The longer you wait to collect benefits, the lower your costs. Since you have short-term disability coverage, you can choose a longer elimination period for your LTD insurance to reduce your premiums.
Here’s a sample of the monthly cost for a 35-year-old male non-smoker buying $3,000/month based on different waiting periods:
| Waiting period | Monthly premium |
|---|---|
| 30 days | $105.33 |
| 60 days | $74.23 |
| 90 days | $56.73 |
| 120 days | $52.60 |
| 180 days | $45.20 |
| 365 days | $41.80 |
| 730 days | $38.26 |
Cost of disability insurance based on riders
Riders are optional coverages for your disability insurance policy that you can buy for an extra cost. The following are three common riders:
Own occupation
A disability policy might define disability in a variety of ways. In other words, your policy’s definition of disability will affect if you qualify for benefits after an injury or sickness.
The own occupation rider means that you can qualify for benefits if you are totally disabled in your job, even if you can return to work in another occupation. Without this rider, your monthly benefit ends if you start a new job.
Cost of living adjustment
This rider provides an automatic increase in coverage amount during disability claims. The increase is indexed to inflation up to a maximum amount, like 3% or 8%.
While it’s not applicable for short-term disabilities, it’s an essential rider for long-term disability policies. If you didn’t have this rider, inflation would decrease the purchasing power of your monthly benefit over the long term.
Partial and residual disability
Partial disability means that you are unable to work full-time after a disability. Residual disability means because of a disability, you can’t earn the same wage as before. A partial or residual disability rider can help you bridge the gap between what you earned before and after your disability.
In most cases, residual benefits are computed as a percentage of lost earnings. So, for example, if you can only earn 50% of your pre-disability income, you will receive 50% of the monthly benefit.
Here is the difference in monthly premium for a 35-year-old male non-smoker buying $3,000/month with and without these riders:
With riders: $67.61
Without riders: $38.26
How Much Should You Pay For Disability Insurance?
As you can see, the cost of long-term disability insurance depends on both your personal factors and policy choices.
Premiums typically range between $25 and $500 per month. If you are young and buying a small amount of coverage, you will be on the low end of the range. However, if your annual income is high and you buy all the optional riders, your cost will be on the upper end of the range.
As a general rule, budget between 1% and 3% of your annual income. That means if you earn $100,000 per year, you should expect to pay between $1,000 to $3,000 per year or $83 to $250 per month. Here are some ranges based on different levels of income:
$30,000: $25 to $75 per month
$50,000: $42 to $125 per month
$75,000: $63 to $188 per month
$125,000: $104 to $313 per month
How can you reduce your costs?
Besides quitting smoking, you cannot do much with your personal factors to reduce the insurance premiums. Even then, you have to be smoke-free for one year before the insurance company considers you a non-smoker.
Because of that, your best bet to lower your costs is with the policy choices. In general, you should take the largest benefit amount and longest benefit period you can get. However, you can go with a longer elimination period, like 120 or 180 days. The short-term disability benefits should keep you afloat during this time.
Another thing you can do is to choose fewer optional riders. The residual disability and cost of living riders are important to have. But other ones like the own occupation rider are more of a luxury than a must. If your budget doesn’t allow for it, you can drop these types of riders.
Lastly, find out about the cost of group long-term disability insurance through your employer or association. The benefit of going through them is that the cost is averaged out across the company, so you may get a more affordable rate.
Is it worth getting long-term disability insurance?
Is disability insurance worth it? In an ideal world, everybody would have it because it decreases the chance of a financial crisis. Considering it only costs 1-3% of your annual income, everybody should buy a disability insurance policy. It’s a small price to pay to ensure you protect your income now and in the future.
You need income protection the most if:
- You rely solely on their earned income to fund your lifestyle
- You are a young professional who begins your careers heavily indebted (e.g., medical professionals)
- You have family members to support
- You don’t have much savings built up
Of course, these are not the only categories of people who need income protection. But it does show who is the most financially vulnerable to a long-term disability.
Need A Disability Insurance Quote?
Buying disability insurance can be tough. Insurance companies offer all sorts of different policies. So how do you choose the best one for you? And how do you integrate your individual policy with group LTD and government plans?
That’s where an experienced and knowledgeable insurance advisor can help. We guide you through the entire process to find you the right policy from the right insurance company—one that gives you the best protection and fits your budget.
In the end, the decision to guarantee your income is one of the most important ones you will ever make. So contact us today at info@briansoinsurance.com or (604) 928-1628 to obtain a disability insurance quote.
Get Your Disability Insurance Quote Now
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
