Disability insurance level vs graded premium

[s2km]

I currently have a graded premium and every year I get asked whether I want to change it to level.   The quoted level premium is about $100-120 over what the premium is now. I'm not sure if it goes up proportionally the same as the graded one does each year.  I have roughly calculated what the break even point would be based on the last couple years of what the quoted level premium would be and I think I can hold off on going level for about 5-6 more years. Is that the right way of thinking about it?

[MR Insurance Consultants]

The graded premium will not increase proportionately to the increase in level premium available to you each year. Do you still have the policy or original proposal you were illustrated when purchasing coverage? If so, you should be able to review a chart that actually projects these two costs for you.

Waiting 5-6 years to convert your graded premium to a level premium means locking into a level premium that's likely 20-30% greater than that which you can secure today. You need to look at your policy specifically, but this will not be advantageous long term. Over the 20-30 years you maintain this policy, you will pay more premiums by waiting 5-6 years to convert than you would if you converted to level today.

 

[moretolife]

Hi S2KM,

If you plan to hold the policy for the entire 20-30 year term your total premium paid will be cheaper with the level premium.

However, if you are a saver and anticipate that you may reach a level of net worth to self insure within 10 years, you may no longer need the disability policy and choose to discontinue the coverage. In that case, you will pay less by continuing the graded premiums.

I personally am counting on the second scenario. Until then, the graded premium still provides the same security and coverage.

Good luck!

[MR Insurance Consultants]

I completely agree with moretolife. There are a lot of factors to consider, but typically the magic number is your late 40s to early 50s. If you don't think you'll need your coverage beyond this point, a graded premium will provide the less costly option. Anything beyond that age range however, would likely be less costly if you start with a level premium from the start.

Option two is definitely the more attractive option, but just be realistic about your decision and projections. Not everyone will be ready to drop their disability insurance by age 47 or 50 or even 52, and having an annually increasing premium (which gets pretty costly around that age) could encourage you to drop your coverage prematurely.

That said s2km, your decision should not be whether to convert to level premiums this year or 5-6 years from now. The answer to that question is easy - convert sooner. The bigger question is whether you want to stick with a graded premium long-term or feel you may need this coverage beyond the time frame where that strategy would make sense. Try to look through your original policy and/or proposal - there should be a chart that can help you make this decision.

[BCBiker]

I'm a resident with a plan to be a super-saver FI in 10-15 years once I finish training in two years.  I want to buy my own disability policy and am comparing level vs. graded premium through Guardian with own occupation. 30 year old pathologist.

I believe the quote is starting at $67 per month for $3500 (as resident) with partial disability and increasing benefit riders. No COL rider (this seems stupid to me).

 

For the same coverage level it will be around $120.

 

Any advice on why or why not to do this would be helpful.

[LBKCLU]

Since you are not opting for the COLA Rider, I would suggest that you purchase a larger monthly benefit.

As a Pathology Resident, you automatically qualify to purchase up to a total of $5,000 month of individual coverage.

You should also look to see if your illustration of coverage includes a Student/Resident discount as this will provide an additional 10% savings (and is available at many teaching hospitals).

Finally, if you are currently residing in Florida, you might also want to look at MetLife's policy as they also offer a graded premium structure (with rates that increase annually or remain at a lower level rate for 5,10, 15 or 20 years) and their includes full coverage for claims related to mental/nervous and/or substance abuse disorders (at this time Berkshire does not offer this for any policies purchased in Florida).

The only other carrier that includes full mental/nervous coverage in Florida is The Standard but they do not offer a graded premium.

Otherwise, using the graded premium makes sense. In the event your situation changes, you will have the ability to convert from a graded to level premium structure on any policy anniversary up to age 50.

[scbunker]

MR Insurance Consultants wrote:

you should be able to review a chart that actually projects these two costs for you.

Click to expand...

FYI, attached is what my chart looked like (from Guardian). It also tabulates Graded Premium and cost of Level Premium conversion for each year.

[MR Insurance Consultants]

I've attached a copy of the chart I was referencing. Do you have one like this?

[childay]

I used the chart such as MR posted and figured out the breakeven point (what age it would be more expensive to do graded).  If you think you can be financially independent at that age, then do the graded.  Personally we are a two income household so that makes the decision even easier.