Often there is a preconception that life insurance gets more expensive as you age. In some cases, this is true because as you get older, you’re more prone to injury or illness and can be riskier to insure. There is a choice with your premiums: you may choose a stepped or level life insurance premium.
However, what does that mean and which one is right for you and your unique situation? There is no straightforward answer as both policies are suitable for different types of policyholders. This article aims to explain the pros and cons of stepped vs level life insurance premiums, to prove that it needn’t be a difficult choice and in fact, offers individuals greater choice in protecting their family.
We aim to help you make a more informed decision about which option is the best fit for your lifestyle, needs and circumstances now and into the future.
What is a level premium?
A level insurance premium does not change as you age but is generally more expensive than a stepped premium in the beginning. As level premiums don’t increase each year with your age, they can give you more certainty on cost when planning for the future.
Depending on how long you hold the cover level premiums can save you money in the long-term. If you want to control your costs over time, level premiums may suit you as they are usually higher in the beginning but much cheaper than stepped premiums when you are older. If you intend to hold the insurance for a long time, level premiums will generally be more appropriate.
A level premium does increase a little with inflation and often reverts to a stepped premium structure once you reach a certain age (usually 65).
| Pros | Cons |
| You’ll save money long term.
Ideal for anyone who wants long term financial protection. You can roughly budget for premiums, because they remain more constant over the years. |
More expensive to pay for initially.
You’ll end up on a stepped premium eventually, which could one day start to erode the savings you made. |
What is a stepped premium?
As the name suggests, stepped premiums rise over time, but are considerably cheaper at commencement of the policy. Premiums increase each year with your age and indexation of the sum insured. With stepped premiums, you save money in the short-term, with the knowledge that your family are protected.
One drawback to a stepped premium is the inability to accurately predict and properly plan for the increasing premiums. Policyholders with stepped premiums need to look ahead to think about whether they will have the funds required for higher premiums as they approach their fifties and sixties (and statistically at a higher risk of needing to claim). If you’re thinking about this option, consider how long you intend to hold the insurance for, to ensure you will be able to afford the increase in premium.
| Pros | Cons |
| Cheaper when you first get insured.
A suitable option for those who may not want life insurance long term. |
You’ll pay more in premiums over the life of your policy.
Can become too expensive to maintain when you’re older, which is generally when you need it most. |
How long will you hold the policy?
A major consideration when choosing between stepped and level life insurance premiums is how long you intend to hold the policy. While no one knows what their future holds, life insurance policies are generally a long-term purchase and a level premium may be your wisest choice.
If you can predict certain life circumstances, you may only plan on keeping it for the short-term and not for the remainder of your life. You may be in Australia on a short-term work contract from overseas and only planning on living here for a few years. In this case, a stepped level premium may be a sensible choice.
When are you taking out cover?
Another important factor to consider when deciding between policies is your current age. As you age and there is the always-increasing risk of illness and death, a level policy will generally change to being stepped.
What are hybrid premiums?
Hybrid premiums are a combination of level and stepped. They start off more expensive than your typical stepped premium, but cheaper than your level ones. It then increases like a stepped premium for a set period of time and will then lock into a rate once you reach a certain age.
These hybrid products aren’t always available with every insurer. However, they could be something to consider if you’re looking for a combination of the two premium types.
In conclusion, it is most cost effective to insure long term risks with level premiums and short term risks with stepped premiums. For example, a young person who still has 30-40 years of working ahead of them, a level premium income protection policy would be more cost effective. Or a person with a 30-year mortgage should be covered with death and total permanent disability cover on a level premium. Older people generally have shorter term risks so stepped premiums would be more appropriate for them.
If you would like more information about these different premiums and what may be the best option for your individual circumstances, we would love to meet you. Arabon Financial Services offers Arabon Accounting clients a FREE consultation to review any existing life and income insurance policies. Our expert advisers will evaluate your policies, consider the appropriateness of the level of cover and provide you with a comparison of premium with other insurers. A free consultation is also available for Arabon clients that do not already have insurance policies in place. The sooner you act, the more you will save. So don’t delay, call Arabon Financial Services on 3278 3455 and ask to speak with a financial adviser.
