12 November 2019
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Life Insurance: Stepped versus level premiums

Alex Homer
10 October 2016

By Alex Homer

We are not fortune tellers or psychics, but every day we make decisions which affect our future.

Take, for example, selecting a mortgage. We carefully consider whether a fixed or variable rate product would be more suitable. One provides more certainty, makes budgeting easier and potential rate rises won’t be cause for sleepless nights. The other provides greater flexibility and rate drops will be music to your ears.  

You make this decision based on your own circumstances. Things like how long you want to hold the property for, whether you need to renovate, and if you want to make additional repayments should all be taken into account. 

Similarly, when selecting your superannuation investments, there are many investment types available to consider. Growth, balanced, conservative and cash are just some options. 

Then you consider these factors against your situation and life stage. You consider your age, how comfortable you are with investment risk, how long before you are able to access your funds and your own retirement goals. Are you an investment analyst in your twenties who is open to a level of risk and enjoys researching the various investment options your super can provide? Or, are you nearing retirement and looking for more stable or low risk options to help with planning your retirement income? No matter what your situation is, weighing up the options hopefully results in a comfortable lifestyle in retirement. 

However when it comes to purchasing life insurance, often individuals don’t take the time to weigh up one of the most important considerations – the different premium options available. 

The preconception is that life insurance gets more expensive as you get older. In many cases this is true, because as we age we’re more susceptible to illnesses which increases our life insurance risk. However, there’s a premium option which allows you to have more stable premium deductions throughout the life of your policy. 

When looking at life insurance options, we should all consider whether stepped or level premiums would work better for us and our lifestyle. 

Option One: Stepped Premiums

Stepped premium payments (recalculated at each policy anniversary or at renewal) usually increase each year as the risk level increases with age. This increase reflects the increase in the likelihood you might fall ill as you get older. Therefore, these premium levels will normally be cheaper to begin with, which is their main advantage. However, over the years, stepped premiums could increase significantly.

Option Two: Level Premiums

Conversely, level premiums are based on your age at the time you take out the policy, and as a result, they remain more consistent during the life of the policy. 

They are more expensive than stepped premiums at the outset, but depending on how long you hold the cover for, you may end up saving on premiums over the long term.

The below graph is an example of a projected costs of a life insurance policy comparing stepped and level premiums. While every quote will differ depending on the type of cover, insurer, the individual insured and many other factors, the general shape of the graph will be similar. 

There are numerous things to consider when choosing between stepped versus level premiums. For example, how long do you intend to hold the policy for? For many people, a life insurance policy is a purchase you make for the long term, and may want to consider level premiums. However, if you’re an executive from overseas, and only planning on staying in Australia for a few years, stepped premiums may be more suitable for you.

It’s also important to remember that both stepped and level premiums may increase with CPI to help ensure your cover stays relevant to the rising costs of living - level premiums just don’t increase with your age.

Another key deciding factor is affordability of the policy as you get older. Will you have the income to cover higher premiums in your 60s? This would obviously be a very difficult question to answer if you’re in your early 30s.

Unfortunately, many of us don’t weigh up these elements when purchasing life insurance. It is often a rushed purchase at a time of change, for example, after buying a new home or having children. As a life insurance comparator, Lifebroker helps customers understand different insurer offerings, policy types and payment options. We find that taking a step back and thinking through these details can make a big difference in the long run. By understanding your options, you don’t need to have a crystal ball to look beyond the immediate future to help set yourself up for the long-term. 

Disclaimer: This is a sponsored article by Lifebroker

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