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Lowering the Cost of Disability Insurance

If you don't have disability income insurance because you can't afford the premiums, there are several ways to make disability coverage more affordable. But follow these two rules: buy the best quality coverage you can afford, and don't pay for what you don't need.

Choose a shorter benefit period

You will save a significant amount of money by reducing the length of your disability benefit period. The general rule you should follow is to buy as long a benefit period as you can afford. However, it's also true that many disabilities don't last more than four years, and some estimates say only 24 months. So, buying a disability policy with a five-year benefit period may make sense if you can't afford to buy a policy with benefits that last until age 65 or for a lifetime. If you reduce your benefit period from age 65 to five years, you might save 30 percent or more of the premium cost. You should also determine whether buying an individual short-term policy makes sense. If you are already covered by a short-term policy at work, for instance, you might only need long-term coverage, so reducing your benefit period from age 65 wouldn't make much sense.

Choose a longer waiting period

Choosing a longer waiting period used to be one of the easiest ways to lower your disability insurance period because the length of the waiting period largely affects premium cost. But it's becoming harder for most people to use this strategy because some companies are doing away with short waiting periods (e.g., 30 days) or offering them only to low-risk individuals. Some companies offer 60-day waiting periods, but the most common waiting period is 90 days. So, this strategy may primarily benefit people who are able to extend the elimination period to 180 days. And never opt for a waiting period that is longer than you could afford to support yourself after you become disabled.

Buy less than the maximum coverage you're offered

Your insurance company will determine the maximum amount of insurance you can buy. This figure will not equal 100 percent of your salary, but most insurers will aim to replace 50 to 70 percent of your gross earnings (i.e., your earnings before taxes and deductions). However, if you think you can survive on less income after you become disabled, you can elect to receive a lower monthly benefit than the maximum allowable. This, in turn, will reduce your premium. One way to figure out what you can afford is to analyze your need for disability income, then compare the cost of the least amount of coverage you will need with the cost of the maximum coverage you can buy. Then, find out how much it would cost to buy a policy with a benefit somewhere in between the two extremes.

Eliminate riders

You will save quite a bit of money if you buy a good-quality base policy and add only a few riders on to it. Some of the most expensive riders include the return of premium rider (which can double the cost of your policy) and the cost-of-living rider (which can add 40 percent to your premium). If you need more than a bare-bones policy, don't eliminate riders altogether, but be careful to choose only the riders that you really need and can afford.

Choose a step-rate plan

A step-rate plan is a plan whose premium is initially low, then increases after a certain period of time. The premium remains level thereafter. If you purchase a step-rate policy, you'll likely get high-quality coverage at a low initial premium. However, if you keep the policy long enough, you'll end up paying a higher premium than you would pay for a level policy. Step-rate plans are generally purchased as individual disability policies. Group policies often work like term insurance. Premiums are gradually increased yearly and increase more rapidly the older you get.

Buy a policy that offers special rates to preferred risks

You may be able to save money on disability insurance by purchasing a plan from a company that offers lower-than-standard rates to individuals who are at especially low risk for disability. This rating class (called preferred or preferred select) most commonly consists of nonsmokers in low-risk professions who are in excellent health. If you smoke, however, be aware that instead of offering preferred rates to nonsmokers, many companies simply increase substantially the premiums that smokers pay.

Buy disability insurance through a group

One way to save money on disability premiums is to buy group disability insurance if it's available to you. Although you may receive fewer, less-flexible benefits, group insurance is cheaper than individual insurance. One major drawback to this type of insurance is that if you leave the group (e.g., by quitting your job), you can't keep the insurance policy in force. However, if this is the only type of disability coverage you can afford, or if you already have health problems or can't otherwise get coverage, having group disability insurance is a lot better than having none.

Buy a loss-of-income policy

Disability insurance based on loss of income is generally cheaper than insurance based on an occupational definition of disability. In particular, policies with own occupation definitions of disability are especially expensive and are being offered much less frequently. When you buy a loss-of-income (income replacement) policy, you are lessening the insurance company's risk because you will receive benefits in proportion to how much income you have lost as a result of disability, which in most cases is less than 100 percent.

Shop around

Make sure that you compare the pricing of similar policies at different companies to ensure that you're getting the best possible policy at the best possible price. For instance, you may find that company A classifies your occupation in a lower-risk category than company B, thus lowering your premium somewhat, or that company B charges you more for certain riders than company A.

Although you should buy insurance that will adequately protect you against disability, sometimes it comes down to this: Either you buy no disability insurance protection, or you buy a low-cost policy. Any coverage you buy is better than no coverage.

One of the real dangers in trying to reduce the cost of disability insurance is that you might end up with a less-than-perfect policy. Is it worth risking the quality of coverage to save a few dollars or even a few hundred dollars? That depends. In many cases, it's true that the less you pay for disability insurance, the less coverage you will get. But it's also true that you simply may not be able to afford the best policy money can buy. In addition, you may not need the most comprehensive coverage available. When you're shopping for disability insurance, decide what coverage you absolutely need. Then, decide what coverage you can live without. Don't compromise on the essentials, but don't pay for the extras.