Term Life Insurance – Stepped or Level Premiums?

Stepped vs Level Premiums: Which One is More Affordable for My Term Life Insurance Policy?

Buying life insurance can be complicated, if not time-consuming. However, the more time and effort you put into it, you may find life insurance is not a one-size-fits-all type of cover as each policy is different depending on your needs and personal circumstances. Although, the goal of every cover is ultimately designed to help you ease the burden of an otherwise difficult financial situation brought by events such as death, injury, illness or disability.

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A simple life insurance product that can offer up to $1,500,000 in a lump sum payment on death or diagnosis of terminal illness.

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Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
Provides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.
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What are the different types of life insurance available in Australia?

  • Term life insurance/life cover: Term life cover pays a lump sum benefit that your beneficiaries can use to meet immediate expenses, such as medical fees and funeral costs, and other financial obligations if you pass away or have been diagnosed as terminally ill.
  • Income protection: provides a replacement income generally up to 75% of your monthly gross income if you are unable to work for a certain period of time after an injury or illness.
  • Trauma cover or critical illness insurance: provides a lump sum benefit in the event that you are diagnosed with a specific medical event as listed in your policy.
  • Total and permanent disability (TPD) insurance: provides a lump sum benefit if you have been rendered as totally and permanently disabled as a result of an illness or injury and you are unlikely to return to work ever again.

Each of these life insurance cover can be purchased as a standalone policy or as a combined plan depending on your protection needs and the level of risks you are exposed to.

Why Consider Term Life Insurance?

If you are looking to protect the future of your loved ones should anything happen you, consider having term life insurance cover in place.

As previously mentioned, term life insurance provides a lump sum benefit in the event of your death or if you have diagnosed with a terminal illness and are expected to have less than 12 months to live. Most term life insurance policies have a guaranteed renewable feature, so your cover can continue until you turn 99 years old, as long as you pay your premiums on time when they are due.

There are a number of factors that can affect the cost of your term life insurance, including other types of life insurance. These include your age, gender, occupation, health, lifestyle choices and hobbies. In addition, your choice of premium structure - stepped or level premiums will also affect your premium rates overtime.

What's the Difference Between Stepped and Level Premiums?

When comparing various term life insurance plans, you will come across the terms of two most commonly offered premium structures - stepped and level premiums.

Stepped premiums increase every year as you age and when your policy is renewed. The premiums generally start off quite low when you apply for cover at a young age; however, as your health deteriorate in the later stages of life, your premiums will be significantly higher due to increased risk of a claim. Stepped premiums can be a good solution if you are looking for a short-term cover or if you have a limited budget.

Level premiums, on the other hand, is fixed at the start of your policy and remains the same until the policy ends. Since the premium remains the same, level premiums require a much higher initial payment than stepped premiums. Despite the expensive initial payment, the redeeming factor of this type of premium is the expected rate you have every month. It is important to note that you premiums will still have small increases each year to factor in inflation at around 3-5%; however, the amount will be relatively modest when compared to stepped premiums.

Both premium structures have their advantages and disadvantages, and it is important to have careful considerations when deciding which premiums would suit your needs better in the long run.The Difference Between Stepped and Level Premiums Overtime
Stepped and Level Premiums Diagram
If you still have difficulty choosing which type of premium payment you would go for, putting some factors into play could help before talking to your insurance adviser.

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 – some may do so faster than the others, but the fact remains that all of us change our minds. Moreover, as you grow older, your needs could either increase or decrease. It could increase since the older you get, the more exposed you are to different health risks.

It could decrease, on the other hand, when all your children have finished college and you have no other financial obligations except to your spouse and yourself.

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 – from food to education fees, the bills seem to be endless. This scenario can lead to anyone shying away from getting life insurance. The alibis, it is too expensive and my budget won’t fit, could come into play.

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.

Do you have enough savings in your super?

Most of those who have been working have superannuation. If you have been boosting your super fund, then you could check if you have enough savings for your retirement.

What does it have to do with your life insurance? Whether you get life insurance to give you more cover or meet some needs, choosing a stepped premium when you have enough savings could be a poor choice since your insurance costs will increase as you grow older. You could add to your savings by opting for a level premium instead.

When choosing which type of payment premium you need for your term life insurance, evaluate your needs – both present and future – and your family's financial obligations. If you have the ability to pay for a higher premium and thinking of the long term, you may want to consider level premiums. However, if the higher initial payment is out of your range at present, stepped premiums could be the affordable solution. The bottom line is you have cover for whatever uncertainties there are in life.

Maurice Thach

An insurance researcher and writer for finder.com.au who loves finding an answer to the question "Am I covered for ________?" Maurice has also completed a Tier 1 Life Insurance and a Tier 2 General Insurance Certification under ASIC's Regulatory Guide 146. This means he can confidently provide general advice for life insurance and non-life insurance products.

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