Why Is Disability Insurance So Expensive?

Why is disability insurance as a doctor so expensive? It’s not uncommon to get a quote for a couple hundred to a few hundred per month in premium for a disability insurance policy (ouch!) 

We’ll cover why disability insurance costs so much, what you can do to lower the cost, and what’s even more expensive than paying too much for a policy.

Why is disability insurance so expensive compared to other policies like term life insurance?

How much would a $2 million, 20-year term life policy cost for a male in his early 30s? 

According to our life insurance calculator, about $62 to $98 a month, depending on his health.

How much would that same person need to pay for $12,500 of income protection on an own-occupation disability insurance policy?

Our disability insurance cost calculator estimates anywhere from $600 a month on the low end to just under $900 a month on the high end (this assumes a specialty with lots of surgical volume).

In this hypothetical example, a highly protective disability insurance policy costs 10 times as much as a highly protective term life policy. What accounts for the huge difference in cost?

Probability of disability insurance payouts is higher than you expect

According to the CDC, one in four twenty-somethings will experience a disability that prevents them from working before retirement.

Often, this disability lasts one to three years, but sometimes it lasts for decades.

Luckily, the probability of a catastrophic disability is much less than a disability that prevents specialists from being able to perform certain surgical procedures.

However, if you buy an own-occupation policy, it has to pay out if you can’t perform your specialty anymore, even if you’re able to live an otherwise normal life.

So, the risk of payout is far higher on a disability insurance policy than most other policies. 

Consider a 20-year term life policy at age 30. According to Social Security, if you start out with 100,000 males at age 0, you’d have 96,850 still living at age 30. At age 50, 89,523 would still be living. 

That means there’s a 7.5% chance the policy would have to pay out. The true probability is likely even lower, as there’s selection bias in the insurance company’s favor of who would buy term life in the first place (healthier, higher-income people who have disposable income to spend on insurance).

If you purchase $12,500 a month of income protection on a disability policy, you could be perfectly healthy and earn that income for 30 years or more. 

If you bought a COLA rider (cost-of-living rider), then that payout would increase over time as well.

Example of the huge potential payout of own-occupation disability insurance

For example, a 35-year-old physician who becomes disabled and has $12,500 a month of income protection with a 3% a year COLA rider would collect over $7.1 million in disability insurance payouts by age 65.

Because the probability of that incident occurring is higher, the huge potential payout risk must be covered with much higher premiums than for other insurance policies.

While a catastrophic disability might shorten your lifespan and thus reduce the payout from the insurance company, an own-occupation qualifying disability might not be that severe and thus might have little to no impact on how long you live. Therefore, the payout would be expected to be much higher.

How much disability insurance should you buy if it’s so expensive?

Like with any insurance policy, you should buy what you need and what you can afford.

If you’re a resident or fellow, spend $100 to $200 a month on a policy that allows you to buy additional coverage later without a medical exam. 

If you’ve graduated from school or training, lock in discounts up to 10% to 30% that you only qualify for within a limited window once you’ve completed your training. 

A good rule of thumb is to sum up your mortgage and car payments. That’s the absolute minimum income protection you need. If you can afford it, double the sum of your mortgage and car payments and cover approximately that amount. The higher number would be a guess of your wants + needs.

If you have a spouse or partner in a high-income field, you may feel comfortable with less coverage. But it’s important to consider that a disability often increases the risk of relationship instability, as unromantic and sad as that is to think about.

So, to be economically independent and protected, it’s a good idea to have an adequate amount of coverage to protect the years of time and hundreds of thousands of dollars spent obtaining your hard-earned skills.

Consider fewer optional riders if you have to 

You might feel comfortable modifying some of your optional policy riders or even opting out of some of them in order to reduce your disability insurance cost.

Some options would include increasing the waiting period before benefits start after a covered disability (the elimination period), opting out of student loan riders if you’re going for forgiveness, and weighing the pros and cons of opting out of the cost-of-living rider.

An experienced disability insurance agent can help you weigh these pros and cons, and they’ll also explain which riders are absolutely essential (such as own-occupation).

If you want to lock in the biggest discounts you qualify for, including discounts up to 30% if you recently finished or are finishing residency or fellowship, fill out the quote form with SLP Insurance or another qualified independent agency. If you use us, we’ll find you the best price we know of for the coverage you need, even if we don’t make money on the policy.