Question 5: How much will my long-term disability insurance policy cost?
Premiums for group policies are typically calculated using multipliers (i.e., the total income that will be covered is multiplied by a constant agreed upon by the group). The range of multipliers may be very wide depending on the strength of the policy. Multipliers may be over 1% for strong policies and closer to 0.1% for weaker policies. For a benefit that pays 60% of a $60,000 resident salary, this comes out to a premium of around $5 to $50 per month ($60 to $600 per year) for a benefit of $3,000 per month ($36,000 per year). These estimates are also featured in Table 3.1.
Group LTD insurance premiums are typically paid with pre-tax income. Therefore, the benefits paid in the event you become disabled would be subject to taxation.
Individual policies will also range widely in price depending on the terms of the policy (e.g., definition of disability, length of eligibility, future purchase options and Cost of Living Adjustment riders, etc.). Most policies for residents that include strong terms will run from 2 to 5% of the benefit amount. Since most residents will only qualify for a benefit of approximately $5,000 per month, this comes out to a premium of around $100 to $250 per month ($1,200 to $3,000 per year). See Table 3.1 for comparisons of estimated group and individual LTD policy rates.
Individual disability insurance policies are typically paid with post-tax income, therefore the benefits paid in the event you become disabled are not taxed.
Table 1. Comparison of example group and individual rates
Note: These rough estimates are for illustration only and do not represent any real policies. Cost index is the premium divided by the benefit. Whereas premiums for group policies tend to be paid with pre-tax earnings and therefore benefits are subject to income tax, individual policies are normally paid with post-tax dollars and have tax-free benefits.
* Group benefit assumes 60% coverage for a $60,000 salary ($3,000); the individual benefit assumes purchase of the maximum amount typically available to residents ($5,000).