Level versus Stepped Premiums


By Michael Mekhitarian

When you’re considering long-term insurance cover, like life insurance, it’s important to know the difference between level and stepped premiums.

For example, life insurers generally offer clients the choice between level or stepped premiums or a combination of both, within the policy.

Insurance Policy

The basic difference is this:

Stepped Premiums in a policy mean that the cost of the premiums increases as the policy holder (you) ages, so the upfront costs are lower.

Ultimately, if the policyholder has the policy for a long period of time, the cost of the policy can be significantly higher when compared to one with level premiums.

Policy Holder

Level Premiums remain stable over the duration of the policy to a predetermined age (for example perhaps 60 years, when they convert to a stepped premium structure because at this point there is a higher likelihood of claim).

This can provide policyholders with a degree of certainty year after year, what the policy is going to cost. There may be CPI increases in the premiums, and premiums can also change is may change if the underlying assumptions about the policyholder, or costs associated with the policy since its start date change.

Hybrid Premiums combine both stepped and level premiums.

Life Insurance

The ‘stepped versus level premiums’ conversation is definitely one you should have with your financial planner. It’s not as straightforward as it may seem, and it really depends on what you need. While a stepped premium policy may cost more in the long run, it might be beneficial for you to take advantage of lower premiums over the first few years, depending on where you are within your life, and what your own personal outgoings are. This initial saving can be worthwhile in many circumstances.

Generally speaking, if the policyholder has an insurance policy for a short period, it will be more cost-effective under a stepped premium structure.

However, if the client holds the policy for the longer term, it may be more cost-effective under a level premium structure. The most important thing is that you choose the right policy for you. Replacement policies can be costly, because some insurers don’t allow clients to retain their entry age premium rates, even if they need to cancel and replace their cover at a later date.

Also consider whether you should pay for your insurance inside or outside of your superfund.

Get professional advice, this is general information only and you need to have advice tailored to your specific needs and circumstances

For more information, contact us.