Considering income protection? Find out how stepped and level premiums are different.
One of the most important factors to consider when applying for income protection insurance is the premium structure. The premium structure is just one of the factors to be considered in addition to the premium frequency (how often you pay) and whether they are index-linked (keep pace with inflation).
- Stepped premiums: Start out lower but will increase overtime with age.
- Level premiums: Start out higher but remain the same over the life of the policy.
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How do stepped and level premiums compare over time?
Both stepped and level premiums have their own benefits but the choice comes down to your present financial situation. To make the difference more vivid, the graph below will show the difference between a stepped and level premium.
For example, consider an average 38-year old male with an annual income of $80,000 and a $5,000 monthly benefit. The calculation would include inflation, agreed value, guaranteed renewal, and a benefit period of up to 65 years old with a 1 month waiting period.
|Age||Annual Stepped Premium||Annual Level Premium|
27 year average
Total premium to age 65
So which option is best for me?
Some tips to make life insurance as affordable as possible depending on your circumstances at the time are as follows:
- Level premiums are most suited if you are taking out long term cover and are confident that your income will steady in the years to come. This is a smart option if you are younger and looking to take out cover for a long period of time and want to save for the future.
- As the premium is fixed, you know what it will be into the future
- You can increase your level of cover (and the premium to be paid) if you choose
- Long term saving as your premium remains the same overtime
- Stepped premium is better suited to short term cover of up to 10 years. In this case the increase each year will remain within your capacity to pay and the first few years will be considerably cheaper. This can be a better option for applicants with lower disposable income at the start of their career
- More affordable at the start of the policy as you are only paying for the risk associated with your current age
You will have to assess your own position both now and what you expect it to be in the future to be able to make up your mind on which structure suits your own situation best.
What else will impact the premium I pay?
There are a number of other factors that will impact your income protection premium:
- The policy you choose and level of cover
- Whether you choose agreed value (based on the income determined at application time) or indemnity value (based on your income at claim time) cover in place
- Your occupation and the level of risk it carries
- Any additional benefits you choose to include on your policy