Stepped vs Level Insurance Premiums

When considering to take out a life insurance, income protection or trauma insurance policy you have the choice of how you would like to structure your insurance premiums either through stepped or level premiums.

The most common option is stepped premiums - Stepped premiums means that the premium increases with the life insured’s age therefore as you get older and become a higher risk to the insurance company your premiums increase to reflect this.

The other alternative is level premiums - Level premiums means that the premiums remain the same up to age 65, after this time they revert to a stepped style premium. Initially level premiums will be higher than stepped premiums in the early years of the policy but over the long-term it will be cheaper. The big advantage of a level premium is that you know in advance what the premiums will be and don’t find out later you can’t afford the cover when you need it most.

Case Study

John who is 40 years old, has taken out a mortgage for $500,000 and is considering taking out a life insurance policy to cover him and his family should something happen to him. John is planning on repaying his mortgage over a 25 year period. John is thinking that he will need the cover for at least 20 years or longer depending on his future financial situation.

John is considering both stepped and level insurance premiums  to get an understanding of what will be the most competitive option for him.

In John’s case his current stepped premiums for $500,000 worth of life insurance is $38.03/month, whereas for level premiums it would be $83.40/month. The advantages of the stepped premium is that right now the premiums are more affordable, while the level premiums are more expensive (i.e. more than double) in the long run they will be cheaper.

Conclusion

Both level and stepped premiums are good options, however it depends on each persons situation to determine which option would suit them best. However should you be wishing to hold the cover over the long term level premiums is the more affordable option?

Disclaimer:

The information provided is general in nature and does not take into account your particular insurance needs, financial situation or investment objectives. We recommend that you speak to an xLife risk advisor before you make any decision regarding life insurance.
xLife Pty Ltd ASIC No. 305213 is a Corporate Authorised Representative of Milennium3 Financial Services Pty Ltd.
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