Disability Insurance: Graded or Level?

[Rotish]

My disability insurance salesmen from residency are advising me to change my graded plan to a level plan, since it will save me over the course of my life.  Looking at the scale they provided, I wouldn't break even until 20 years from now, when I'm in my early 50s (adjusting for inflation, probably mid to late 50s).   I'd expect to become financially independent at some point in my 50s, and would prefer the increased cash  flow in my first decade as an attending.

 

Is keeping the plan graded the right move for me?

[jhwkr542]

Sounds like it

[Scott at MD Financial Services]

Sounds like you have Guardian as a policy.  The other way to look at this is what does a different carrier besides Guardian want to charge for your same contract?  The Level rate with a different carrier might only be 4-6 years before the graded would exceed it and not 12-15. In addition, if you are willing to take an increasing policy then certainly also look at the Guaranteed Renewable contracts as they are projected level rates for the term of the policy vs. guaranteed increasing premiums.

Let me know if we can help further.

[The White Coat Investor]

If I had it all to do again, I'd get graded. I'm not sure exactly how much longer I'm going to carry my IDI policy, but it won't be past 50 and graded generally comes out ahead in that scenario.

[Rotish]

Yea, I’m very confused by this. Why would a 62 year old still have need a disability policy that would pay out for 2-3 years? It’s money well spent as a new attending when it could provide a 30 year steady income stream, but is anyone really depending on that policy when you’re in the twilight of your career?

[rag145]

I would suggest the graded.  You will have more money to put into your Schwab total stock index fund, with an expense ratio of only .03 percent.  If you do the math on even a modest return, it will be in your favor.  You just need something to take the edge off for 8 to 11 years.  This is what I did, and it worked out well (46 years old now).  In my view, this is a no brainer.  You must take advantage of compounding and the time value of money.

[docnews]

I chose level because it is a simpler product so it is easier to shop for. Plus a level policy has a personal graded feel due to inflation which decreases both the cost and value over time. Plus your chance of using it increases but hopefully your absolute need for it decreases as you save. When the need is nil then you can consider dropping this bet against your health. The problem is many people budget items out years in advance (often when they shouldn't) so they need/want this cash flow insurance in their late 50s. An example is someone who planned on cash flowing their kids' college education.

[TheGipper]

Graded. No brainer.

My Berkshire agent tried to push me to graded when I was a resident but I was a financial moron back then and thought she was trying to rip me off.

[RosieQ]

I'm doing a mix with a 5k level policy that I might keep a bit longer as a "buffer" policy if I'm right about at financial independence but not there yet. I have a large graded policy from Guardian that I'll likely keep for 2-3 years while I do a whole bunch of saving and living like a resident.

In the recent WCI email there was a good point. Disability insurance should cover your living expenses but also your saving expenses early on in your career. If you are disabled early you can live on your insurance but if you can't save too then come 65 years old you are out of luck. Once you have enough saved that you expect it to grow to a reasonable amount at 65 you can cut way back on your policy to only a basic living expense coverage. Since you are not saving for true financial independence at the moment, but assuming continuing growth then much smaller amounts of savings can allow you to cut back on your coverage.

Plus the extra pain of seeing my premiums grow every year helps keep me focused on saving so I don't get ripped off.

[AlexxT]

Rotish wrote:

Why would a 62 year old still have need a disability policy that would pay out for 2-3 years?

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My policy would pay until 70 if you're disabled after 60 ( maybe 55?).

[adventure]

Rotish wrote:

Is keeping the plan graded the right move for me?

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Well, changing likely put more $ in the pocket of your agent, so keep that in mind.

[childay]

I went with graded Guardian policy for myself, anticipating cancelling the policy early (mid 40s?).  I don't recall the break-even point but it seemed the right choice.

My wife has a level policy.  Just compare and make your best prediction.

[The White Coat Investor]

TheGipper wrote:

Graded. No brainer.

My Berkshire agent tried to push me to graded when I was a resident but I was a financial moron back then and thought she was trying to rip me off.

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That sounds familiar. Most of us were financial morons at that point.