Deciding between stepped or level life insurance premiums is not always an easy choice to make. But did you know that the way you structure your premiums can make a big difference to how long you keep your insurance and how much you pay over the lifetime of your policy? So here we’ll discuss the two main types of premium structures, stepped or level premiums, and which is better for the long term.
Level or stepped premiums for long term affordability?
When thinking about the cost of stepped over level life insurance premiums, think about your family, your mortgage, your health, and your job.
Stepped premiums are initially cheaper than level premiums, and are good if you are taking insurance out for a short period, or for a specific loan. However stepped premiums increase significantly as you age. You could end up paying up to five times more for the same level of cover in the long run, regardless of age or gender.
Level premiums, on the other hand, are generally higher than stepped rates but over the life of a policy as stepped premiums increase, level premiums don’t (1). This represents a significant saving, meaning you can maintain your premiums more easily in the long term as you grow older.
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For an example, take a 35-year-old male non-smoker who is looking at $1,000,000 of life insurance coverage. Stepped premiums may initially seem like a great deal. However, by age 44 the stepped premium amount begins to exceed the level premium he could have been paying. He is unlikely to be able to afford to keep paying stepped premiums into his 50s, despite needing insurance cover more than ever.
Don’t let your life insurance policy lapse
The chances of making an insurance claim increase later in life, when stepped premiums typically increase significantly. The average age at which a stepped trauma plan is canceled is 40. However, most claims are made by people in their late 40s and 50s.
By choosing stepped premiums for your long-term insurance needs, you run the real risk of paying higher premiums compared to level premiums. So if you decide to let your policy lapse due to the high cost of holding a long term stepped policy you risk leaving your family unprotected when statistics tell us the chances of a claim are greater.
Level premiums vs stepped premiums
|Initial annual premium|| |
|Total premium paid to age 65|| |
|Savings using level premiums|| |
Source: AXA Insurance 2010
Which is better, stepped or level premiums?
Find out if stepped premiums or level premiums suit your needs. If you are unsure which life insurance premium structure would best suit you, you might want to compare life insurance quotes and find a premium style best suited to your needs.
1. Level premiums are not guaranteed and may change in the future due to rate, CPI and policy fee increases. Level premiums alter to stepped at various ages, please refer to your current PDS.
Source: AXA 2010