When is Disability Insurance Too Expensive?

Disability insurance premiums are based on the risk of loss to the insurance company in relationship to a disability. Insurance premiums are based on the insured’s age, occupation and the potential for a disability occurring that results in a loss of earnings. Disability insurance is as expensive as the risk factors related to the loss potential to the insurer. 

Disability Income Insurance

Disability income insurance is a necessary commodity that should be considered by every working adult. Disability income insurance provides money for loss of earnings, for an established period of time, while someone is disabled. The benefit is typically provided as part of an employee’s group disability coverage or is purchased on an individual basis.  When purchased individually, the benefits payable are not taxable since premiums are paid with after-tax dollars.  In the case of an employer-sponsored group disability plan, the employee’s benefits are taxable to the extent that the employer pays premiums.

Disability Insurance Pricing

The price of a disability income insurance policy is determined by the insurance company and their risk model. The insurance company compares the likelihood that a person may become disabled during their lifetime relative to the type of occupation or hobbies and interests. Risk is assessed on a class basis, looking at the likelihood that disability will occur for large number of insured individuals based on age, gender and occupation class. The greater the risks for any class of individuals, the higher the cost of the disability income insurance.

Insurance Premiums

Premiums are calculated with a consistent formula throughout the industry. All insurance companies will price certain behaviors in a similar way. However, that does not mean that an insurance company will not break away from normal pricing. Sometimes, companies decide to price differently, more or less expensive, depending on their own standards.

Mutual insurance companies are insurers that are owned by their policy holders. The premiums paid for a disability income insurance policy, as with other types of insurance are based on the loss exposure to the insurer. When the insurer has a claim’s experience that is less than expected, this may result in a policy dividend being paid to its policy holders who have participating policies. A policy dividend is the unearned portion of premium paid by the policy holder and returned annually.

Considering a Disability Policy

When considering the purchase of a disability income insurance policy, a policy holder should look at the pricing factors that go into pricing the premiums. What a person does, what a person makes and any exposure to risks that may cause a disability are what the insurance company looks at. This will determine the premium or expense of the policy and this is the only consideration important to the insurance company.