Compare Stepped vs Level Premiums to Find Your Best Match

Published: March 12, 2018

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.

Both stepped, and level life insurance premiums have their advantages and disadvantages. It's essential to compare stepped vs level premium life insurance structures to determine which one best suits your specific requirements. While stepped premiums start off cheaper, they might be better suited for the short-term, whereas level premiums are more expensive at the beginning but more affordable in the long-term.

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.

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What are stepped life insurance premiums?

Stepped life insurance premiums are typically considered the cheaper premium type because they start off more affordable. However, they are recalculated every year while your cover amount remains the same. Stepped premiums increase as you get older because your risk to the insurer rises as you move closer to your life expectancy and you become more likely to claim on medical issues.

According to Strategic Insight’s 2018 report, Stepped premiums are still the most commonly used type for life insurance premium in Australia, dominating at almost 90% of premiums.

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

Advantages Disadvantages
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.

What is a level premium?

A level premium is based on your age at the time you took out your life insurance policy. Although they are more expensive at the start than stepped premiums, a level premium life insurance structure does not increase every year due to your age and can save you money in the long-term. Level premiums can provide more certainty concerning your future insurance costs. However, premiums might still go up due to changes in stamp duty, your insurer’s base rates, and because of CPI increases.

Because of these possible increases, you shouldn’t consider level premiums fixed. Many people have chosen level premiums thinking that the price they pay won’t change and are upset when they see that this isn’t the case. It’s better to know right from the start that increases are a possibility.

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

Advantages Disadvantages
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.

How do hybrid premiums work?

Hybrid premiums start on a higher than average stepped premium structure, increasing every year due to your age, and then converts to a level premium style when it reaches a predetermined price. Your premium rate will then stay relatively consistent until you reach the age of 60 or 70, depending on your insurer, at which time your premiums will revert back to a stepped premium structure.

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.

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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.

Your age

The main advantage of stepped premiums is in its low initial cost, so it might be more practical if you’re on a tight pensioner’s budget and only need cover for a few years. However, the older you are, the higher your premiums will become, because of your increased risk of mortality. A middle-aged individual might prefer level premiums for their affordability in the long run.

The length of time that you want to be covered for

First, determine how long you want to keep your policy. If you, for example, are planning to live in Australia for a few years and only want coverage for a short period, then stepped premiums may be more suitable. However, if you desire to maintain a policy for many years to come, level premiums might be the better choice.

Your current finances and lifestyle

Stepped premiums are much more economical at the beginning of a policy and may be a good option if you’re looking for a short-term policy to pay off loans or debts. On the other hand, if you can afford to pay level premiums at the beginning of your policy, it’s likely that you’ll be able to maintain your coverage for years to come.

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

Can you switch from stepped to level insurance premiums?

Yes, you are generally able to switch from a stepped premium structure to a level premium type without the need for additional medical questions or exams. When comparing life insurance policies, be sure to ask if the insurer offers a level premium structure or the even the hybrid premium type.

Are level life insurance premiums guaranteed?

Yes, in a few cases level premiums can be guaranteed. Select insurers guarantee that their level life insurance rates will not increase. This statement is defined in varying degrees, with some companies being absolute in guaranteeing that their level premiums will not increase; while others mentioning that their level premiums will not increase unless the government places taxes, duties or charges onto life insurance policies in general.

Many companies in Australia place a clause in their product disclosure statement outlining that in the event of a major life event, life insurance premiums may indeed increase. These life events include things like pandemic life threatening diseases. If you are in doubt, be sure to read the product disclosure statement (PDS) or consult an insurance specialist.

How does the premium freeze option work?

A premium freeze allows you to freeze the cost of your life insurance premiums when you find yourself in a pinch and unable to afford the premium increases. However, to enable your premium price to remain constant, your cover amount will be adjusted yearly to remain fixed at the amount you were paying when you contacted the insurer to freeze your premiums.

The premium freeze option is only available with stepped premiums from select insurers and does not extend to your policy fees or the stamp duty portion of your premium.

Your premium freeze will generally stay enforce until you're ready to remove it. You'll usually be provided with the opportunity on your policy anniversary, and you might have to notify your insurer in writing.

Will stepped and level premiums keep up with inflation?

Both stepped, and level premiums will usually keep up with the rate of inflation. However, you might need to select inflation protection to ensure your cover remains relevant to the rising cost of living.

You can also request that your insurer remove this automatic increase from your policy to keep it more affordable.

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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