Which is Better: Level or Graded Disability Premiums?
How Level Premiums Work
When purchasing physician disability insurance you have to decide between level or graded premiums. So ask yourself: When it comes to protecting your income, would you rather:
- Pay more now to have the same monthly payment for the entirety of the policy?
- Pay less now and have your premium payments increase over time?
With a level premium, option 1, you pay the same amount for the life of the policy. Assuming you have a non-cancellable 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 upfront. 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.
How Graded Premiums Work
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.
Graded premiums are beneficial initially, because your costs are lower. If you’re a resident or fellow who expects a higher income over time, graded premiums may be easier on your budget. However, after a few decades, you may end up with a much higher payment than what it initially cost.
Which Structure is Better for Physicians?
Practicing physicians and dentists usually find that the level premium is better because they can afford the amount due at policy issue. In addition, it is nice to know what your bill will be over time in the future. No surprises! Medical professionals tend to see their income increase over time, as will other expenses, but with a level premium physician disability insurance policy, your monthly payment won’t budget for 25+ years.
On the other hand, if you are a resident or fellow in training, then a graded structure is advantageous because payments will be low to start and start to rise at a time when you are likely seeing an increase in income. But how much will payments go up? The uncertainty of a graded structure is a downside.
In the initial years of a graded premium structure, you may pay up to 40% 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. 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 select 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.
Don’t Forget the Future Increase Option
Another option to save money in the early years of your physician disability insurance is to elect a future increase option. This enables the policyholder 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 in 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. The American Medical Association allows you to buy a future purchase option but coverage can be increased once within the first 3 years of the policy or before your 40th birthday, whichever comes first. This is a major limitation for physicians in residency or early in practice that may experience significant increases in their income later in their career. All the other individual plans (Ameritas, MassMutual, etc.) give you the option to increase your coverage each year up to age 55.
Looking for Physician Disability Insurance?
It’s tough to read through the various insurance policies to know which one is best for you. For that reason, LeverageRx has an in-house specialist with over 10 years experience who will answer your questions for free. In less than two minutes, you can fill out this form and he will be in touch with you ready to help. In the meantime, here are some popular disability insurance company options that cater to physicians:
Guardian has the best definition of own-occupation. To be considered totally disabled and receive full benefits, you cannot be able to work the medical specialty you went to school for. However, even if you can work somewhere else, Guardian will pay you full benefits since the job is not your specialty.
Learn More: AMA Disability Insurance Review
Ohio National has a stricter definition of own-occupation. The rider for their policy says the physician or dentist who got injured or ill must be under the care of a physician in order to receive total disability benefits.
Learn More: Ohio National Disability Insurance Review