• Christopher Hall

Stepped vs Level Insurance Premiums


Many people choose to take out insurances such as Trauma Insurance, Income Protection and Life Insurance to protect their financial wellbeing and that of their loved ones.


The cost of insurance is often the key deciding factor when purchasing an insurance plan. These costs are most effected by the way you pay the annual insurance premium. Different premium types suit different applicants and their personal circumstances. When considering which option is best for you, it’s very important to assess your current and future financial needs, to determine the most appropriate structure for your situation.

There are two main premium types, Stepped an Level. Each premium type has its merits. Choosing one depends on your budget, your unique lifestyle, needs and circumstances - now and into the future.


As the main difference between Stepped and Level premiums is how much you pay as time goes on, another key issue is how long you plan to hold the cover. The cheaper, Stepped premium structure, seems to be a better deal at first glance, but the Level premium cover is more economical in the fullness of a long-held policy.

Types of insurance premium


There are two main insurance premium types. When reading these summaries, keep in mind that as you age, it’s more likely that your health may deteriorate and so it's more likely you will make a claim.


Stepped Premium

  • Calculated on your age at the time you take out the policy

  • Increases as you age every year at the "policy anniversary", when your premium is re-calculated

  • The annual premium will be lower when you are young and then increase as you age

  • Also increases with the consumer price index, so premium can be unpredictable and more challenging to plan for

  • The cost of cover starts off quite low if you apply for life insurance at a young age, so it's suitable for applicants who have limited disposable income and are looking to secure short-term life insurance cover of < 10 years

  • Also a good option if you are on a very low wage now but expect your earnings to increase substantially in later years, when you feel the higher premium rate won't be a problem

Level Premium:

  • Calculated as an average and based on the age you are when you take out the cover and then locked in for the duration of the policy

  • Doesn’t increase yearly as you age but instead remains the same and will only increase with inflation and policy fees (still less than Stepped premium increases)

  • Expensive when you’re young and earning less but will become more affordable as you get older and earn more

  • The premium savings in later years can make up for the additional payments in earlier years – saving you money over the life of the policy

  • We tend to need insurance cover most in our 40’s, 50’s and beyond, by which time it can have become too expensive to maintain a Stepped premium. With Level cover, the premium remains the same, keeping it more affordable in our later years when our incomes might be less

  • If you think you’ll hold the insurance for more than eight years, Level premiums, with their predictable, easy-to-budget-for outlay, can bring significant savings

  • Note: The earlier you ‘lock-in’ the Level premium, the greater the potential long-term savings because level premiums are generally lower if you take out the insurance at a younger age



Hybrid premium:

Just as you can opt for a combination of fixed and variable interest rate home loans,

you may want to take out part of your insurance using Stepped premiums and use

Level premiums for the rest. What this creates is effectively a hybrid policy which is

a middle point between Stepped and Level premiums.


These premiums:

  • Are higher at the start than Stepped premiums but lower the Level premiums

  • Increase until you/with your Adviser, decide it is an appropriate time to reduce the amount of cover

  • After this point, the premiums may be equal to or less than Level premiums would have been, depending how much you reduce your cover by. This allows you to manage the premium costs better in your later years

Example: You may have a $1,000,000 mortgage and 15 years of children's schooling

expenses ahead of you, prompting you to take out a $2,000,000 life insurance

policy. In 15 years' time, you will no longer have the education expenses to insure

and have paid off half your mortgage - so you might be in a position to reduce how

much cover you need.


This same moment in time is also about when the benefit of having bought a Level

policy in your younger years, would become an advantage, with savings kicking in.

You would however, now be over-insured and wise to reduce the amount of cover

you have.


This situation negates the appeal of a Level policy and highlights how a hybrid

policy would be advantageous. With a hybrid, you would always have had a lower

amount of Level cover and would have significantly reduced the Stepped policy just

as it is getting expensive.


Things to consider when choosing Stepped or Level:


How long do you plan to hold the policy?

Time is an important element to consider as the time frame you choose will directly

affect the costs of your policy. Stepped premiums, since they increase as you age,

may not be a suitable option if you are looking for long-term cover.


If you are an overseas citizen working temporarily in Australia or you only want a

policy for 5 to 10 years however, then Stepped is definitely an option to consider.

Do you plan to increase or decrease your cover in the future?

What chances are there that you will keep the same features and cover a few years

from now?


If you think that what you have right now covers everything there is to cover, and

you intend it to be that way for a long time, then a Level premium may be for you.

As you grow older though, your needs could either increase or decrease. If you

aren't sure and think you might change your priorities, a Stepped premium is worth

considering and could also save you a lot of money on premiums as you age.

Do you have children?

While many people want insurance in order to protect their children, having

dependant children can be expensive and can simultaneously make people

reluctant to get life insurance, because they don't want to allocate household funds

to premiums. A Stepped premium could be the answer here because the initial

payments are low.


Alternatively, you could save the impacts on your household budget entirely, by

looking into paying your insurance premiums with your Superannuation.


Your age at the time you take out cover

As you approach age 65, the difference between the two premium structures

diminishes for new policies.


Inflation protection

Premiums increase with inflation so that your cover stays relevant to the rising costs

of living. Inflation protection adds incremental increases (usually 5 percent) to

premiums, but your family's future is safeguarded at the same value of cover you

began with.


If keeping out-of-pocket costs as low as possible is essential for you,

there is always the option to remove inflation protection from your policy.

Alternatively you can look into taking your insurance premium payments directly

out of your superannuation - not effecting your daily cash flow.

Which factors influence premium calculation?


The more likely you are to make a claim on an insurance policy, the higher the premium. This means that as well as the type of premium you choose, the cost of your cover also depends on a number of different factors used to calculate how likely you are to make a claim.

Factors which will make your premium higher include:

Age:

You have increased health risks as you age


Gender:

Males are more prone to certain medical conditions in the later stages of life than

females


Occupation:

High-risk environment jobs are riskier than office work


Health conditions:

Pre-existing medical conditions may return or worsen


Lifestyle:

  • Smokers will pay almost double in premiums compared to those who do not smoke, regardless of smoking frequency

  • High Body Mass Index (BMI) and/or higher than average alcohol consumption

Hobbies:

Dangerous activities outside of work on a regular basis such as skydiving


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