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Compare Stepped vs Level Premiums to Find Your Best Match in 2023

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.

Russell Cain

Fact Checked

Updated: 19 May 2024

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?

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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.

Life Insurance Direct Comparison Engine (December 2023; Premium estimates for $200,000 of death cover for a 55-year-old non-smoking male and female who works as a school teacher and lives in NSW)

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.

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.

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.

Frequently Asked Questions and Answers

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.

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.

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.

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.

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Specialist

Russell is the founder and CEO of Life Insurance Direct and has been quoted in The Sydney Morning Herald, The Age, Independent Financial Adviser, Risk Adviser, Adviservoice, and Insurancenews. Russell has over 15 years’ experience in the Australian life insurance & financial services sector and is instrumental in driving the latest innovations in our insuretech platform.

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