Compare Stepped vs Level Premiums to Find Your Best Match
Choosing the right premium structure relative to your requirements could save you money in the long run.
When applying for life insurance, you’ll likely have the option to choose between stepped, level, and hybrid premiums. If you’re not sure what the difference is, you’ll either have to make a blind decision at the moment or trust the consultant to give you an objective explanation. However, when it comes to protecting your family, knowledge is power.
Your choice of premium type is an important decision because it can affect your initial premium cost, how much you’ll pay in future, and whether you can afford to keep your policy until you need it.
Understanding your options, compare and make an informed decision you can be confident with now and in the future.
How are stepped life insurance premiums calculated?
Stepped premiums are calculated based on your mortality plus the cost of your cover amount. Fundamentally, your policy is renewed every year on your policy anniversary, with or without the Consumer Price Index (CPI). The calculation would usually involve multiplying your entry age (and renewal age) by your risk factors and then by the sum insured you’ve chosen.
If you’re considering stepped premiums, it’s important to understand that even though it might be cheaper in the short-term, you're likely to pay a lot more for the yours to come.
Pros and cons for stepped premiums
|Initial cost is relatively low. The younger you are when starting your policy, the cheaper your premium will be.||Premiums increase every year as you age, making it difficult to predict its price in future accurately and to plan for the increases correctly.|
|Your premiums are cheaper, in the beginning, so, you can save money in the short-term.||As you get older, stepped premiums can become very expensive to maintain, and you might not be able to afford your insurance when you need it most.|
How are level life insurance premiums calculated?
Level premiums are calculated using your age when you first took out the policy. Each year on your policy anniversary, your insurer will use your entry age to determine your premium for that year, and not your age as you grow older. Level premiums are more expensive than stepped premiums at the beginning of your policy but should average out as you get older.
Pros and cons for level premiums
|Level premiums are usually lower if you hold your policy for 7+ years, making them the cheaper option for the long-term.||Level premiums generally remain pretty constant until age 65, when it reverts to stepped premiums because of your increased risk.|
|The initial cost is higher than stepped premiums.||Level premiums aren’t generally available through super funds or direct life insurance policies.|
Stepped vs level premiums graph
Average monthly stepped vs level premium (as at March 2018) for a male, non-smoker, living in NSW purchasing $1 million worth of life cover. This example is without CPI increases.
Blended life insurance premiums
In recent years, a third premium type was introduced to the Australian market, called Optimum or Hybrid premiums. As the name suggests, this premium type is a blend of stepped and level premiums. Hybrid premiums are only available from select insurers and are generally restricted to a specific age group.
Who should consider hybrid premiums?
Hybrid or ‘Optimum’ premiums are usually more suited to people that cannot afford the more expensive level premium structure from the start of their policy, but would still like to invest in a life insurance policy for the long run. Although this option might be more expensive throughout the lifetime of your policy as opposed to if you had started with level premiums, you still have the opportunity to purchase a cheaper policy type that you can likely still afford when you’re older.
Which is better, stepped or level premiums?
While searching for the best premium structure, it's important to compare policies and weigh the pros and cons of stepped and level life insurance premiums. There is no one-size-fits-all. You need to carefully examine your own circumstances, including your age, finances, family, and how long you want to have your policy for. Once you know what you need, you can compare and review the different premium structures and compare quotes from companies offering the type of premium you’ve chosen.
According to Strategic Insight’s 10-year Individual Risk Market Review, level premiums are more prevalent with income protection insurance, accounting for almost 17% of in-force premiums.
Compare Stepped vs Level Premiums
How to choose between stepped or level life insurance premiums
Several factors influence which premium structure might be better suited your circumstances, including your age, finances, and how long you want the cover for.
When to use stepped premiums or level premiums
Young and single
If you’re a young and healthy individual struggling to make ends meet, then a stepped premium policy might provide you with the short-term coverage you need until you’re in a better financial position.
As your financial position improves, you can consider changing to level premiums so that you can keep your cover affordable over the long-term.
Couples and families
When you’re married, have small children or are pregnant, you’re going to need more insurance coverage to protect the financial security of your spouse and kids. Seeing as your kids will most probably rely on your income until their age 18, you might want to invest in a level premium structure policy that will enable you to keep your policy active until your retirement and even after.
Your frequently asked questions answered
How to compare stepped vs level life insurance premiums
Once you've decided to purchase life insurance, you need to consider how to structure your premiums to best suit you and your family's requirements, while feeling confident that you can afford the cover for as long as you need the protection.
A broker will be able to help you assess the amount of cover you need, show you how your premiums will change in the coming years and help you choose between stepped or level premiums or a blend of both.
Start by gathering a variety of quotes from some of Australia’s leading life insurance companies and reviewing the premium structures they have to offer you.
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