Graded vs. Level Premium Disability Insurance: A Breakdown of Costs

You might have the option to choose between graded vs. level premiums when you buy disability insurance as a physician. Most disability policies will have a level premium, allowing you to budget the same amount each month for the life of the policy. But some policyholders opt for a graded premium, which starts out at a lower cost and increases over time, making it more affordable in the early stages of their careers.

Let’s look at the differences between graded vs. level disability insurance premiums to help you make a decision for your situation.

What is a level premium?

Level premiums for long-term disability insurance remain the same for the entire policy. This means you’ll pay the same cost every month, regardless of your age or how long you’ve had the policy (assuming you have a non-cancelable and guaranteed renewable policy).

The disability insurance company will look at certain individual factors (e.g., age, gender, profession, health, etc.) to determine your overall risk through the entire coverage period. Then, they calculate a level premium that is high enough to cover your higher-risk years at the back end of the policy when you’re in your 50s and 60s.

Level premiums are great for policyholders who want the stability of knowing their disability insurance costs won’t increase over time and plan to keep their policy through to the traditional retirement age.

How do graded premiums work?

Unlike level premiums that stay the same, graded premiums increase each year on the policy anniversary date. This allows you to carry sufficient disability coverage at a cheaper cost in the early stages of your career when your income is lower. But it also means you’ll pay significantly more over the life of the policy if you choose to stick with graded premiums until traditional retirement age.

A graded premium structure might be an appealing option if you’re a resident or fellow with a limited salary. In which case, you can start your policy with graded premiums to secure the lowest cost possible. Then, convert the policy once you’re in practice and can easily afford coverage with level premiums.

Graded vs. level premiums for disability insurance: Example costs

Here’s a sample comparison to demonstrate the difference in costs between graded vs. level premiums for disability insurance. Keep in mind that disability insurance costs vary by insurance carrier and policyholder situation.

Age	Policy year	Graded premium	Level premium	Annual premium difference	Cumulative premium difference
31	1	$1,565	$2,755	-$1,190	-$1,190
32	2	$1,643	$2,755	-$1,112	-$2,301
33	3	$1,720	$2,755	-$1,035	-$3,337
34	4	$1,794	$2,755	-$961	-$4,298
35	5	$1,889	$2,755	-$866	-$5,164
36	6	$2,002	$2,755	-$753	-$5,917
37	7	$2,110	$2,755	-$636	-$6,553
38	8	$2,238	$2,755	-$517	-$7,069
39	9	$2,374	$2,755	-$381	-$7,451
40	10	$2,522	$2,755	-$233	-$7,683
41	11	$2,689	$2,755	-$66	-$7,749
42	12	$2,865	$2,755	$110	-$7,639
43	13	$3,059	$2,755	$304	-$7,335
44	14	$3,282	$2,755	$528	-$6,806
45	15	$3,518	$2,755	$763	-$6,043
46	16	$3,760	$2,755	$1,005	-$5,038
47	17	$3,993	$2,755	$1,238	-$3,800
48	18	$4,210	$2,755	$1,455	-$2,345
49	19	$4,452	$2,755	$1,697	-$649
50	20	$4,685	$2,755	$1,931	$1,282
51	21	$4,900	$2,755	$2,145	$3,427
52	22	$5,242	$2,755	$2,487	$5,914
53	23	$5,727	$2,755	$2,972	$8,886
54	24	$6,377	$2,755	$3,622	$12,508
55	25	$7,021	$2,755	$4,266	$16,774
56	26	$7,512	$2,755	$4,757	$21,531
57	27	$7,945	$2,755	$5,190	$26,721
58	28	$8,295	$2,755	$5,540	$32,262
59	29	$8,592	$2,755	$5,837	$38,099
60	30	$8,864	$2,755	$6,109	$44,208
61	31	$9,133	$2,755	$6,378	$50,586
62	32	$9,401	$2,755	$6,646	$57,232
63	33	$9,670	$2,755	$6,915	$64,147
64	34	$9,939	$2,755	$7,184	$71,332
65	35	$10,208	$2,755	$7,453	$86,507

For this example, a graded premium policy is cheaper for roughly the first decade. At which point, premiums quickly exceed the cost of a level policy — growing significantly more expensive by the year.

Additionally, note that the breakeven threshold in this example for when it costs more overall for graded vs. level premiums is around year 20 of the policy. If you plan to reach financial independence and retire early, graded premiums could work out in your favor. Otherwise, it’s generally best to choose level premiums from the start or plan to convert the policy when financially able.

Pros and cons: Graded vs. level premiums

Here are some pros and cons to consider when choosing between graded vs. level premiums for disability insurance.

Pros of graded premiums

• More affordable when you have a limited income.
• Opportunity for short-term savings due to lower premiums.
• Flexibility to convert to level premiums early in the policy.
• Premiums are based on actual risk at each stage of the policy.

Cons of graded premiums

• Annual costs increase over time.
• Significantly more expensive over the life of the policy (if active through traditional retirement age).
• Higher risk of policy lapse due to higher costs later in the policy.
• Only available through select insurance carriers.

Pros of level premiums

• Predictable premium payments for the life of the policy.
• Long-term affordability as your income increases.
• Less likely to cancel policy due to changing costs.

Cons of level premiums

• More expensive than graded in the early years of the policy.
• Premiums are based on overall risk throughout the policy.
• Class rates can increase if the policy isn’t non-cancelable.

How to choose between graded vs. level premiums for disability insurance?

With a graded premium policy, you could pay up to 40% less for disability insurance in the initial years of the policy compared to a level premium structure. This option can appeal to young policyholders who are just starting out in their field, making lower incomes and having other financial obligations to worry about, such as student loans. But a disability insurance policy with graded premiums will be much more expensive in the long run, assuming you keep the same policy until retirement age.

Related: How to Compare Disability Insurance Quotes Like a Pro

And we aren’t just talking a few thousand dollars more expensive. Referencing the cost comparison example above, a policy with graded premiums until retirement age could cost you roughly $75,000 more overall than a level premium policy.

It makes sense that level premiums are overwhelmingly more common than policies with graded premiums. But graded premiums might make sense if:

• Disability insurance costs are a real issue. If you’re a resident or fellow, you might choose to start with a graded premium and then convert to a level premium once you have a high physician salary.
• You plan to retire early when the overall cost of graded premiums is less than its level counterpart. This is a tricky one because you might have a financial plan to retire early. But the reality is that life has a way of keeping us on the hamster wheel. Lifestyle inflation is a real thing. So, planning to retire early and actually retiring early are two separate decisions.

That said, not all insurance carriers offer a graded premium option. When looking at the “Big 5” disability insurance companies that provide true own-occupation coverage, only MassMutual and Guardian offer graded premiums. 

Get the physician disability insurance you need without overpaying

Choosing a long-term disability policy requires many decisions. This includes picking a strong definition of disability, including strategic optional riders and finding a premium that makes sense for your budget and goals. That’s why we recommend working with an independent insurance broker who will look at your whole financial situation, existing disability coverage, financial goals and overall risk tolerance to find a policy that matches your needs.

To get a quick quote from SLP Insurance, fill out the form below. Our team will reach out to discuss individual policy options and work with you to find the most affordable coverage by using the top discounts available.