When it's time to protect your income, would you rather:
- Pay more now and maintain the same payment for the life of a disability insurance policy?
- Or, pay less today and have your premium payments increase over time?
That’s one of the key questions you’ll need to answer when you purchase long-term disability insurance. Your insurer will likely offer you a choice between a level or graded premium structure.
With a level premium, you pay the same amount for the life of the policy. Assuming you have non-cancelable and/or guaranteed renewable policy, your premium obligation will remain constant for as long as you own the policy.
Under this structure, the insurance company established a premium schedule designed so that you pay more of the cost of insurance up front. This way, the insurer can benefit as much as possible in case you file a disability claim early in the life of a policy or surrender it at a later date.
A graded structure, on the other hand, starts with a lower premium payment that gradually increases over time. The amount may increase each year and there may also be a step-up rate every five years. The longer you hold the policy, the more likely you are to file a claim and the higher the company will raise rates.
A level premium is advantageous if you can afford the amount due at policy issue, as it is easier to budget for something that never rises in cost. In addition, your income will likely increase over time, as will most of your other expenses, yet your disability insurance will remain the same even 25 years later.
A graded structure is advantageous if you’re a student, resident, or just beginning your practice. This will enable you to have more affordable coverage while you’re still dealing with large student loan payments and before you’ve fully maximized your income.
In the initial years of a graded premium structure, you may pay up to 40 percent less for insurance than if you opt for the level structure. Then, as you earn more income, you can afford to make the increasing premium payments.
Consider how long you may keep your policy
Graded premiums are also an option for those who may eventually drop their coverage as it will take several years before you’re paying more under the graded structure than you would have with a level premium.
Experts say the break-even point between the two structures is typically sometime in your early 50s. After that point, you will end up paying more over a lifetime for the graded premium structure than you would have had you elected a level premium at policy issue.
Insurers typically allow you to switch from a graded structure to a level structure on your policy anniversary. Therefore you could elect a graded structure at policy issue for a year or two, then switch over to a level payment once your income has increased. Keep in mind that when you make this change, the new level payment will be based on your age at the time of the switch, not your age at policy issue.
Another option to save money in the early years of your physicians disability insurance is to elect a future increase option.
This enables the policy holder to increase the amount of coverage at a future date without having to undergo additional underwriting. A future benefit increase would typically be triggered by an increase of income. Essentially, it’s designed so that you’re only paying for the coverage you absolutely need at the time you encounter a need for disability benefits.
Ready for a deeper dive? We've got you covered:
The Ultimate Guide to Physician Disability Insurance in 2019
Colin is the Founder & CEO of LeverageRx, a personal finance company exclusively for doctors. Colin has over a decade of experience in financial services and is a licensed life and health insurance agent.