Disability Insurance: Graded or Level Premiums?
Jun 20, 2013
Jamie Fleischner

Jamie Fleischner

20 Jun, 2013

Some insurance companies have a premium option payment to pay either a level, fixed premium or a graded, increasing premium.

Level premiums are available with all individual disability insurance policies. With a level premium, the rate is fixed and guaranteed to age 65. Make sure your policy has the clause noncancelable, guaranteed renewable. This ensures your rate is fixed. If it is a guaranteed renewable only contract, the company can increase rates in the future.

Some companies offer a graded or increasing premium. This allows you to purchase a policy initially at a lower rate. This is especially helpful if you are a medical student, dental student, medical resident or a young professional. Rates are significantly less expensive. There is a schedule of rates so you know what to expect each year.

If you start with a graded premium, you have the option of changing to a level, fixed premium on your policy anniversary. When you change to a level premium, you lock in your rate at your attained age, the age at the time of the change.

Level, fixed rates are usually about 40% more expensive than the graded rates. Therefore, if you have a schedule of graded rates and in the future you want to know the cost of changing over, add approximately 40% onto your premium.

The breakeven age is around age 52, depending on your policy. As such, if you plan to hold onto your policy well into your 50s or 60s, you would be better off with a level, fixed premium. If you plan on dropping or not needing your policy in your 50s, you would be better off with a graded premium. If you are starting your career and have a lot of expenses and student loans, the graded policy may be a good option for you.

The best time to lock in to a level rate is before you reach age 40. This is when the rate curve becomes more steep.

For more information about individual disability insurance, to request a personalized quote comparisons or if you have questions about graded or level premiums, contact Set for Life Insurance today!

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