Disability Insurance Premium – Graded vs. Level
Once you make the decision that you need income protection, and you find a policy that fits your needs, now you need to decide how to pay for it. Insurance companies offer a few options:
- Noncancellable & Guaranteed Renewable with fixed level premiums – Once you get the policy everything is guaranteed until age 65. The insurance company cannot change the policy language or premium as long as payments are made and the policy stays in force.
- Guaranteed Renewable with level premiums – If your policy does not include the “noncancellable” language then your premium is not guaranteed, and can change. The insurance company cannot single you out, however if your occupation class is filing more claims and costing the insurance company more money than expected, they can decide to raise rates on everyone in that occupation class.
- Guaranteed Renewable with graded premiums – Some companies and association plans offer a graded premium option where your payments start off low, and increase every year, or in some cases every 5 years. In the beginning you save about 40% compared to fixed level premiums. However this cost continues to rise each year and eventually the policy becomes more expensive than a fixed option. In most scenarios the breakeven point is around age 52.
For most people the best option is Noncancellable and Guaranteed Renewable to age 65. This way your premiums are locked in at the age you take policy, and there will be no changes. However there are a few scenarios where a graded premium could make sense:
- If you are a dental student/resident with little to no income, and large student loans, you still need income protection to secure your future earnings potential. You can chose to buy a larger policy and start out with graded premiums. Then once you start working and are able to make the payments, you can convert your policy to a level fixed premium at your attained age.
- The breakeven age for level vs. graded premium is around age 52. So if you plan on dropping your disability policy by age 52 you could benefit from a graded premium scale. If you plan on keeping your policy into your late 50’s or 60’s you would benefit from a policy with level premiums.
- If you are starting a new practice and have a lot of expenses and startup costs, you may not have extra money to spend on insurance. You may benefit from a graded premium, and then converting to a fixed level premium once your expenses are paid off and income has increased.
For more information about disability insurance graded vs. level options, and to request a personalized insurance quote, please visit our website www.DentistsDisability.com or call (866)220-4880.