Stepped vs Level Premiums
Once you’ve decided you want to get Life Insurance, there are many things you need to think of to tailor the policy to your needs. One of the most important choices you’ll have to make is choosing between stepped or level premiums.
At Wealth Smart, we’re the first to admit that different Life Insurance terms can be confusing and overwhelming (that’s why we’ve developed a Life Insurance Glossary of Terms to clear things up).
But understanding stepped and level premiums is vital to determine just how much money you’ll pay over time on your policy. Since you get to choose which type of premium you’d like, it’s best to familiarise yourself with how they work, what would be the advantages and disadvantages of each, and whether they’re the best choice for you.
Stepped and level premiums determine how you choose to structure your regular Life Insurance premium payments. Read below to find out the differences between the two.
Stepped premiums are the most common way to pay Life Insurance premiums. They’re calculated on your age, with premiums generally increasing with your age. Premiums are typically higher the older you get, since you’re considered more likely to fall ill or be seriously injured.
Stepped premiums are recalculated annually at the policy anniversary. While they do generally rise as your risks rise, they can sometimes drop if your circumstances are deemed less hazardous (such as a young, reckless man transitioning into family life).
Stepped premiums ensure:
- A cheaper rate at the beginning of a policy, so more affordability in the short-term.
- You are only paying for the level of risk associated with your current age.
- Your premium will rise substantially the older you get.
Should I choose stepped premiums?
Since stepped premiums are much more economical than level premiums at the beginning of a policy, they are good if you’re looking at keeping a short-term policy just to pay off your loans or debts.
Similarly, if you’re a young family struggling to make ends meet (kids do, after all, gobble up a lot of your income and savings!), a stepped premium helps ease yourself into a Life Insurance policy. After all, it’s better to choose a cheaper premium than to forego Life Insurance altogether because of unaffordability. Once your finances are freer, you can increase your cover as you wish.
With level premiums, you pay more in the beginning, but the premium costs average out over time so that you can end up saving money. Usually a level premium remains constant until the age of 65, when it reverts to a stepped premium as your risks increase.
Level premiums ensure:
- Security – you know in advance what your premiums will be so you can guarantee you can afford it in the future.
- A fixed price – the premium doesn’t increase annually and remains the same till the policy ends (except for modest yearly increases relating to inflation)
- The flexibility to increase your cover (and your premium) if you choose
- Long-term cost saving as your premiums stay the same, instead of rising steadily as stepped premiums do.
- A higher cost at the beginning of the policy (but this price stays fixed for the length of the policy, unlike stepped premiums).
Should I choose level premiums?
Level premiums are ideal if you plan to keep your Life Insurance policy long-term. If you’ve just taken out a mortgage and plan to repay it over a few decades, you may want to ensure you’re covered by Life Insurance for the same length of time.
Level premiums also suit you if you’re young and look at getting a head start on a long-term policy. While you may pay more initially, you could end up saving a substantial amount over time.
How do I know which premium is right for me?
Getting the right premium from the beginning ensures that you’re getting the best Life Insurance policy for your circumstances.
It’s easy to assume that stepped premiums are better for you since they’re cheaper. But while your budget is an important consideration, it’s also a good idea to think about your future plans for your policy. Do you intend to have it for decades? If that’s the case you may save more with a level premium.
In the end, it comes down to assessing the early affordability of stepped premiums against the long-term affordability for level premiums.
Still confused? If you feel overwhelmed or in need of a helping hand, don’t hesitate to contact one of our insurance experts at Wealth Smart for invaluable advice.
Find out more about Life Insurance with our FREE comprehensive eBook.
About Gerard Phillips. Gerard is the Managing Director of Wealth Smart Australia he has completed courses for Diploma of Financial Services (Insurance Broking), a Bachelor of Commerce majoring in Insurance and Marketing and is a Fellow of the Australian and New Zealand Institute of Insurance and Finance and is currently a Certified Insurance Professional (CIP), he is also a member of the Association of Financial Advisors (AFA).