Stepped and Level Premiums: What's the difference?

Written on the 15 March 2018 by Arrow

 

When it comes to protecting your family, knowledge is not just power it's security.

You have a choice when it comes to paying premiums: stepped or level. But what does that mean and which one is right for you? There is no one-size-fits-all answer as both policies will be suitable for different types of policyholders.

We aim to lay out both the benefits and drawbacks to stepped and level premiums, that proves the question is not complicated; in fact, it offers consumers greater choice in protecting their loved ones. Use this guide to help you make a more informed decision about which option is the best fit for your unique lifestyle, needs, and circumstances from now and into the future.

Level premiums
Level premiums will cost more to begin with, but the premium you are charged will be based on your age at the time you took out that cover. You can still have the cover adjusted to keep pace with inflation the cost of that new cover will be added to the premium each time inflation is applied. Because level premiums don't increase each year with your age, they can give you more certainty on cost when planning ahead for the future.

Depending on how long you hold the cover and as long as you can afford them level premiums can save you money in the long-term.

Stepped premiums
As the name suggests, stepped premiums start off at a cheaper point and rise from there. Premiums are recalculated each year as you get older and/or with changes to the Consumer Price Index (CPI). With stepped premiums, you can save money in the short-term, while resting safely in the knowledge that loved ones are protected.

One drawback to a stepped premium is the inability to accurately predict and properly plan for the increasing premiums. In some cases, stepped premiums may be reduced if, for example, you change from a high-risk to a low-risk occupation.

According to RiskInfo, stepped premiums are the "dominant choice in the Australian marketplace", but is this a lack of foresight?i Policyholders with stepped premiums need to look ahead to think about whether they will have the funds required for higher premiums as they enter their fifties and sixties.

How long will I hold the policy?
A major consideration when choosing between stepped and level premiums: How long do you intend to hold the policy? While nobody can predict the future, life insurance policies are generally a long-term purchase, and thus a level premium may be the way to go.

Let's not imagine that your life is cut short, but think about your circumstances. Maybe you only plan on keeping it for the short-term, and not for several decades? You may also plan on keeping it for a shorter length of time if you are on a work contract from overseas and only planning on living in Australia for a few years. In both these unique cases, a stepped level premium may be a better fit.

Keeping up with inflation
If you have Inflation Protection selected on your policy, both stepped and level premiums will increase with inflation so that your cover stays relevant to the rising costs of living. Inflation protection adds incremental increases (usually 5 percent)ii to premiums, but your family's future is safeguarded at the same value of cover you began with. Check your policy for more information on this. 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.

When are you taking out cover?
Another important thing to remember when deciding between policies is how old you are. Once you reach a certain age, due to ever-increasing risk of illness and death, Level policies will generally revert to being stepped. If you're unsure about which option is best for you, we can help.

i http://riskinfo.com.au/news/2013/05/28/latest-poll-stepped-versus-level-premium

ii https://www.finder.com.au/life-insurance-stepped-vs-level-premiums