When you buy disability insurance, you can decide how you want to structure your payments, or premiums. Disability insurance companies usually offer two options to pick from: level or graded premiums.
Level premiums remain the same over the course of your policy, while graded premiums start low but get more expensive as you get older. Level premiums are the best option for most people unless you’re planning to retire early or expect your income to go up significantly.
What is disability insurance?
Think of disability insurance as income protection insurance. If you can’t work because of an unexpected injury or illness, like a broken leg after a car accident or severe depression or anxiety, you can file a claim and get paid monthly disability benefits while you’re not able to work.
What are level premiums?
Level premiums mean that your rates stay the same over time. Depending on the specifics of your coverage, level premiums could mean your monthly payments stay consistent from the start of your policy to whenever it expires, which could be decades.
Level premiums are likely to be cheaper than graded premiums over time, but you’ll pay more for coverage early in your life even though your risk factors might be lower. That’s because your premium reflects your overall risk of making a claim over the life of your policy, not your risk at any one age.
Can your rates go up over time?
Yes, level premiums can go up over time if disability insurance companies change how they rate certain groups of people. If your insurance company decides it’s going to raise rates for a group you’re a part of, your rates can increase.
You can stop this by adding a non-cancellable rider to your policy. With a non-cancellable rider, your insurance company won’t raise your rates as long as you keep paying your premiums.
→ Read more about disability insurance riders
What are graded premiums?
Graded premiums start lower and get more expensive over time, going up either annually or every few years, depending on the insurance company.
They’re a good option if you’re just starting out in your career and don’t earn a high income yet, but expect to later on, like if you’re a resident physician. Graded premiums can make getting it affordable to get more coverage — but your rates can increase to be thousands of dollars more per year than at the start of the policy.
Should you get level or graded premiums?
While graded premiums can cost more over time, it might be worth it if you:
Want a policy while you’re young but can’t afford level premiums
Plan to retire very early and can avoid the higher premiums
Plan to drop your disability insurance before you retire
Have a job where your future earnings will offset the later cost of graded premiums
You might want level premiums if you don’t plan to get a policy early in your career, or you plan on keeping your disability insurance through retirement age. It also can come down to preference: level premiums are easier to budget for over a long time.
Once you have an idea of how long you plan to keep your policy and what your earnings will look like, calculate the total cost of your disability insurance with each type of premium to see which is cheaper over time.
How to add up premiums over time
Here’s an example of how the cost of graded premiums might change for someone who wants to keep their policy until they’re 60 years old. Starting at 46, this person’s disability insurance costs $2,259 a year, but increases by an average of 7% every year after.
The total cost of this person’s policy by the time they plan to drop their coverage is nearly $60,000, or about $4,000 a year. Graded premiums wouldn’t make sense for this person if level premiums cost less per year during the same time.
Age | Graded premium (annual) | Total amount paid (lifetime) |
|---|---|---|
46 | $2,259 | $2,259 |
47 | $2,490 | $4,749 |
48 | $2,732 | $7,481 |
49 | $2,978 | $10,459 |
50 | $3,246 | $13,705 |
51 | $3,527 | $17,232 |
52 | $3,793 | $21,025 |
53 | $4,052 | $25,077 |
54 | $4,303 | $29,380 |
55 | $4,546 | $33,926 |
56 | $4,777 | $38,703 |
57 | $4,973 | $43,676 |
58 | $5,120 | $48,796 |
59 | $5,272 | $54,068 |
60 | $5,428 | $59,496 |
Disability insurance rates for a 46-year-old male applicant, non-smoker
When should you get disability insurance?
The best time to get disability insurance is when you’re relatively young. Your rates will be cheapest when you’re younger and you can lock in coverage for the rest of your career.
According to the Social Security Administration, about 1 in 4 20-year-olds will become disabled before they retire, so it’s a good idea to get disability insurance well before you might need it.
→ Read more about how to figure out if you need disability insurance
Frequently asked questions
What are stepped disability insurance premiums?
Stepped premiums are the same thing as graded premiums, it just means your payments start smaller and go up yearly or every few years. Some companies just used the term stepped instead of graded.
Do all insurance companies offer graded premiums?
Most disability insurance companies offer the choice between graded and level premiums, but there are always exceptions. Sometimes you may not be able to get graded premiums up past a certain age.
What will your disability premium be?
Your disability insurance premium depends on factors specific to you, like your age, health, job, and any risky hobbies you have. Your rates also depend on your policy’s benefit amount, benefit period, and elimination period (the time between your disability and when you start to receive disability benefits).
