Looking to secure a life insurance policy to protect the financial wellbeing of your loved ones? While there are many different things to consider, the cost is often the key deciding factor when purchasing a life insurance plan.
One important feature that affects the cost of cover is whether you choose stepped or level premiums. The difference between stepped and level premiums is how much you will pay as time goes on.
Stepped or level premiums?
- Stepped premiums will generally increase with your age eg every year at the "policy anniversary" your premium is re-calculated.
- Level premiums will remain the same despite your age eg you'll usually pay more in the beginning but it will even out over time.
Both types of premium structure have different benefits that make them suitable for different types of policyholders.
Case study: How premiums go up when stepped
We analysed stepped premiums from NobleOak Premium Direct Life Insurance to find out how premiums will go up over time.
Sample stepped premiums from 31 to 40
Here's a side by side example of a hypothetical stepped v level annual premium over 10 years.
| Age | Stepped premium | Level premium |
|---|
31 | $145.96 | $200 |
32 | $159.86 | $200 |
33 | $173.77 | $200 |
34 | $187.67 | $200 |
35 | $215.47 | $200 |
36 | $222.42 | $200 |
37 | $229.37 | $200 |
38 | $243.27 | $200 |
39 | $243.27 | $200 |
| 40 | $250.22 | $200 |
10 year average | $207.13 | $200.00 |
Total premium to age 40 | $2,071.28 | $2,000.00 |
Stepped level premiums are based on a sample profile from NobleOak Premium Direct Life Insurance in February 2019. Level premium is made up for illustrative purposes.
How do you decide what's right for you?
Generally, level premiums don't make it worth it until the 9-11 year mark. This means you probably will go for a level premium if you keep cover for a longer time period.
How long do you want to have the cover?
Time is an important element to consider when making decisions about life insurance as the time frame you opt for will directly affect the costs of your policy. Stepped premiums, since they increase as you age, may not be such a suitable option if you are looking for a long-term cover. However, if you are thinking along the lines of 5 to 10 years just to be there to pay off some loans or for your children's education then stepped is definitely an option to consider.
However, if you are thinking about building your estate and leaving an inheritance for your family, then a level premium is your premium payment of choice, one which can also save you a lot of money.
Do you want to keep the same level of cover?
Do you plan to modify or increase your cover in the future or lessen your benefit amount? 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 for a long time, then level premium is for you.
However, human nature makes us change our minds – as you grow older, your needs could either increase or decrease. If this is the case, then a stepped premium is for you, which could also save you a lot of money on premiums when you decrease your cover.
Do you have children?
When you are a parent, children play a big role in your decision making. You don't consider just yourself or your spouse anymore, but those young lives under your care as well.
Having kids can eat up a whole lot of your income. This scenario can lead to anyone shying away from getting life insurance.
Instead of abandoning the idea of having insurance, a stepped premium could be the answer with its low initial payment. And when you are much freer from your financial obligations in the future, you could increase your cover.
Hybrid premiums
There is a third option available to policyholders in the form of hybrid premiums. Hybrid premiums are the middle point between stepped and level premiums.
Hybrid premiums cost more at the beginning of the policy than stepped but lower the level premiums. Premiums increase until the policy reaches a predetermined age when the premiums level off.
Once this happens the premiums are higher than level but are lower than stepped and not subject to increase. Not all insurers offer hybrid premiums.
| Key differences | Stepped premiums | Level premiums |
|---|
| What type of mortgage is it similar to? | Similar to the nature of a variable mortgage. | Has characteristics similar to a fixed mortgage. |
| How often do my payments increase? | Premiums are reviewed and calculated on a yearly basis on every policy anniversary. | Premium rates remain the same, with small increase each year due to indexation to keep up with inflation (usually around 5% or higher than the CPI). |
| What about as I get older? | Your premiums will increase significantly once your reach age 50 and over. | Your premiums will generally become more affordable for policy owners once they reach the later stages of life. |
How exactly do stepped premiums work?
Stepped premiums are a type of premium structure that will increase over time as you age and the higher the likelihood that you will make a claim. The older you are, the more likely that you health may deteriorate and therefore, your premiums (under stepped structure) will increase significantly, especially past 50 years of age.
With stepped premiums, the cost of cover will start off quite low when you apply for life insurance at a young age. Therefore, it may be suitable for applicants who have limited disposable income and are looking to secure short-term life insurance cover.
What about levelled premiums?
Unlike stepped premiums, your premiums will not increase as you age when you opt for level premium structure. Instead, your rates will be calculated based on your age at the time of application and locked in at a fixed rate for the duration of your policy. It is important to note that level premiums may still change in the future due to inflation rate, Consumer Price Index (CPI) and increase in policy fees, although the rise may be considerably less than stepped premiums.
With level premiums, the rates you pay at the commencement of your policy are generally higher when compared to stepped rates. However, your premium rates are calculated over the life of your policy and therefore, your cover will become more affordable as you get older and accumulate more wealth. Level premium structure is suitable for applicants who are looking to secure long-term life insurance cover.
Which insurance brands offer stepped, levelled and hybrid premiums?
Some insurers offer all three types of premiums while others offer only one or two.
Data taken from brand product disclosure statements on May 2017. Benefits, conditions and amounts are subject to change at anytime.What factors influence the amount I pay in premiums?
The premium cost of your cover will also depend on a number of different factors, such as:
- Age. The older you are, the more expensive your premiums will be due to increased health risks.
- Gender. Men generally pay more in life insurance premiums compared to women as they are more prone to certain medical conditions in the later stages of life.
- Occupation. Working in a high risk environment will also cause your premiums to be much higher compared to those who work in an office.
- Health condition. If you have pre-existing medical condition, you will generally pay more in premiums than others in good health.
- Lifestyle. Smokers will pay almost double in premiums compared to those who do not smoke, regardless of how often you smoke. Applicants with high Body Mass Index (BMI) and/or higher than average alcohol consumption can also expect to pay much higher premiums.
- Pastimes. Insurers also do take into account the sort of activities you do outside of work on a regular basis. Undertaking dangerous hobbies such as skydiving, parasailing and bungee jumping can increase your chances in making a claim and therefore, you can expect to pay significantly more in premiums.
Other than the factors mentioned above, there is also another key element to consider that will affect your premiums rates – your choice of premium structure: stepped premiums or level premiums. This article will discuss the differences between these two premium styles and tips to choose the right type of premium to suit your needs.
Which life insurance premium type is right for me?
Choosing between which life insurance premium option suits you best may not be so simple. However, it is important to assess your current and future financial needs to determine the most appropriate structure to your personal circumstances. To help you make informed decisions on which premium structure, level or stepped premiums, is suitable to your financial situation, consider the following:
- Level premium payments are best suited to long-term insurance contracts This is because the premium you pay in the beginning will be the same as you will be paying at the finish. You will have to pay a higher premium than the stepped option initially but when you get older you'll be paying much less. The occasion when this might not be so preferable will be if you are strapped for cash and on a low wage initially but expect your earnings to increase substantially in later years where you feel the higher premium rate won't be a problem.
- Stepped premiums are ideally suited to short-term insurance cover as the increase in premium as you age won't be as severe over a few short years as it is over a long period If you are considering short-term cover, for a period of less than ten years, stepped premium structure may be more suitable.
- Hybrid premium payments are becoming popular This type of premium structure is similar to a variable interest rate mortgage with a fixed interest rate. A hybrid premium is usually made up of initially stepped premiums for the first few years, allowing you to take advantage of the lower rate to accommodate your tight budget at the start, and changing to a level premium at a later date to allow you to handle the cost better in your latter years.
It is crucial for all life insurance applicants to consider their own situation and how this may change into the future in years to come when considering which option is best for you.
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