Disability Insurance | Graded vs. Level Premiums

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When purchasing an individual disability insurance policy, one of the decisions to make is how to pay the premiums.

Assuming your policy is noncancelable, guaranteed renewable, the company can never increase your rates.

All companies offer an option where the premium is fixed for the duration of the benefit period. For example, if you have a policy that pays benefits to age 65, your premiums will be fixed to age 65.  Companies call these premiums level or fixed. The advantage of this premium option is that the premium is locked in and you can budget for that fixed premium. The disadvantage is that the premium can be steep.

Some companies offer graded or step rate premiums. These allow you to pay less than a fixed premium, at least initially. Graded premiums escalate each year and a step rate premium pops up after a period of time, typically 5 years.  The advantage of these plans is that the premium is initially more affordable. This can be helpful for young professionals such as medical residents. Or, if you only plan to keep your policy for less than 10 years, you may pay less with this option. However, the premiums will continue to rise and may become very expensive. You have the option to change the premium to a fixed rate, but the premium will then be locked in at your attained age.

The break even point is usually in your early 50’s. Therefore, if you plan to keep your policy until your late 50’s, early 60’s, you are better off paying with a fixed premium for the life of the policy.

For more information about premium options for disability insurance, contact Set for Life Insurance today!