/ Disability Insurance

Why the Cost of Disability Insurance Varies by State

How much you pay for disability insurance will be influenced by where you live and practice your specialty.

Disability insurance rates vary widely by states. In fact, there are a few states where you will pay as much as 30 percent more in premium for the same coverage as you would in another state.

There a few reasons why disability coverage will cost you more in certain states.

Some states have more insurance regulation

One reason that coverage can be more expensive in some states is the regulatory environment. The more stringent a state’s regulation on insurance products, the more expensive it is for a carrier to get a policy approved by the state’s insurance department. Heavy regulation also usually increases selling, promotional and processing costs.

Often because of regulations, some insurers will decide not to provide coverage in a certain state. For example, New York insurance regulations deter many companies from issuing policies there. The fewer companies you have competing in the market, the higher the price.

Some states have higher rates of disability claims

One of the ways insurance companies determine risk is to look at its past history. In the case of disability insurance, carriers will price their products based in large part on the likelihood of having to pay claims. So the more disability claims an insurer experiences in a region or state, the more it will charge all insureds in that area for coverage.

Data on private insurance claims for disability is difficult to locate. But according to one 2016 report, the state with the lowest percentage of its population receiving Social Security disability benefits was Hawaii (2.8 percent), followed by Alaska (2.8 percent), Utah (3 percent), California (3.1 percent), Colorado (3.3 percent), North Dakota (3.4 percent), Maryland (3.7 percent), Texas (3.7 percent), Nevada (3.8 percent), and New Jersey (3.9 percent).

The states with the highest percentage of their population receiving Social Security disability were West Virginia (8.9 percent), Alabama (8.5 percent), Arkansas (8.4 percent), Kentucky (8.2 percent), Mississippi (8.2 percent), Maine (7.7 percent), Tennessee (6.7 percent), Missouri (6.4 percent), South Carolina (6.4 percent), and Michigan (6.3 percent).

Interestingly, California is known for being one of the highest priced states for disability insurance, yet it has one of the lowest rates of disability claims in the country.

Why the discrepancy? Even though a smaller percentage of Californians claim disability than in other states, the overall volume of disability claims makes it expensive to insure people in the state.

In the same report, Californians racked up $933 million per month in Social Security disability benefits in 2016, three the times the amount paid each month to people in Alabama ($293 million), and nearly eight times the volume paid to people in West Virginia ($122.4 million).

Keep in mind that each individual carrier bases premium rates on its own claims history in a region or state. One company may have far fewer claims in a state than another, and therefore may offer a lower cost policy. This is another reason why it’s important for physicians to shop several alternatives before settling on a policy.

Some states have higher living costs and income levels

Disability insurance is largely priced based on the insured’s income, since the insurance policy pays a percentage of income in monthly benefits.

Therefore, living in states and regions where doctors earn more and that have higher costs of living makes income replacement more expensive for an insurance company, and thus results in higher premiums.

According to the Medscape Physician Compensation Report last year, the top earning states for physicians were:

  • North Dakota (361k)
  • Alaska (359k)
  • South Dakota (354k)
  • Nebraska (346k)
  • New Hampshire (337k)
  • Wisconsin (332k)
  • Utah (327k)
  • Iowa (325k)
  • Minnesota (324k)
  • Indiana (322k)

The lowest earning states in the report were:

  • District of Columbia (235k)
  • Maryland (260k)
  • Rhode Island (261k)
  • New Mexico (261k)
  • Delaware (268k)
  • Virginia (272k)
  • New York (277k)
  • Hawaii (277k)
  • Louisiana (282k)
  • Wyoming (283k)

There’s little a physician can do to combat the cost of disability insurance in their state of residence, unless they move elsewhere just to save a little on premiums.

As mentioned above, make sure you obtain several quotes from different carriers since they may have different claims history.

Also if you’re a resident studying in a more expensive state — such as California — and may move to a more affordable state to establish your practice, you may want to wait until after you moved to purchase disability insurance.