The Premium Model
You’re probably familiar with the premium model if you’ve ever had private health cover. Life cover providers assess premiums on a similar scale.
Your premiums – or how much you pay on a monthly basis – depends on a few different considerations.
Your age and risk of death are two of the biggest determining factors in how much you pay for a monthly premium. However, your job, home location, and health status also play a role in how much you spend.
An insurer will also calculate payment depending on the type of life cover you choose and the level of coverage you decide to purchase.
For instance, a 60-year-old is likely to pay more for term life insurance than a 30-year-old if they both purchase a new policy, since a 60-year-old is usually at an increased risk of death.
The confusion often arises in determining which premium model is more likely to benefit you. Stepped and level premiums are significantly different, and there are advantages and disadvantages to each.
What Are Stepped Premiums?
Stepped premiums in life cover start lower and rise over time, as the policyholder becomes increasingly risky to insure.
Your premiums will rise every year as you get older, reflecting a slight increase in risk of death over this time.
If you purchase a stepped premium policy when you’re 27, for instance, your monthly payment will be lower than someone who is 57.
With a stepped policy, your monthly premium gradually increases over time; the amount depends on how your insurer assesses your risk.
Your insurer will evaluate you annually for each year you own the policy, and this will almost always mean the price will rise incrementally over time.
Do Stepped Premiums Always Rise?
As a general rule, stepped premiums will get higher as you get older – but this isn’t always the case.
There are a few changes you can make to your lifestyle that could reduce your monthly premiums, though the decision is ultimately up to your insurer.
For example, if you quit smoking, lose a lot of weight, or move to an area with fewer violent crimes, your insurer might lower your monthly premiums to reflect the change.
Stepped premiums aren’t set in stone, meaning they’ll rise or fall depending on your assessed level of risk and in line with inflation. Most of the time, though, monthly premiums will increase on a yearly basis through a stepped premium policy.
What are Level Premiums?
Unlike stepped premiums, level premiums don’t rise as you get older. You will pay the same monthly payment at 30 as you will at 50, provided that you keep the same policy.
Age and situation only play a role when you purchase the policy. After that, your premiums will only rise to match how inflation has affected the market.
The only caveat to the above statement is that once you turn 65, most life insurance providers will transition you to a stepped premium model.
The chances of death rise dramatically after that age, so insurers automatically adjust your premiums to match the higher level of risk.
Stepped vs. Level Premiums
At first glance, you might think that level premiums are the obvious option for most people. They don’t increase over time, meaning you won’t face rising premium costs throughout the policy.
Level premiums aren’t for everyone, though. Take a look at the infographic below for an example of how stepped and level premiums work in practice.
When are Stepped Premiums a Better Option?
As you can see, level premiums start higher than stepped premiums, meaning you won’t necessarily save money by choosing a level option.
Stepped premiums are cheaper at the beginning of the policy, meaning they may be a better option for short-term life insurance coverage.
If you’re in your late 20s, for instance, and need life insurance to make sure your family isn’t lost in the tragic event of your death, you may decide on a stepped premium policy.
Your premium payments will be lower, but you can still have a policy with a benefit level that would cover your family’s expenses should the worst happen.
Choosing level premiums at this life stage could result in a much higher monthly premium, which may not offer as much value for money. You should also have the flexibility to cancel this policy in the future or adjust your policy as your needs change.
Stepped premium policies are often an option for young individuals who need life insurance for a short time. As your financial situation changes, you may want to transition to a policy with level premiums for the long term.
When are Level Premiums a Better Option?
Level premium policies may save you money if you decide to keep your policy for decades. You’ll pay more money in premiums at the start of the policy, but this will even out over time.
Level premiums are usually suited to people who want to keep their life insurance policy for the rest of their life. You can lock in your premiums in your 20s or 30s and pay the same rate, in line with inflation, in your 40s and 50s.
Gaining Security Through Life Cover
For many Australians, life cover is a form of security. If the unthinkable happens and you lose your life, your family will still have a level of financial protection.
Whether you’re young and want a short-term policy or are looking for a policy that will cover you for the long term, buying life cover could prevent financial hardship for your family.
No amount of money can fix the pain associated with losing a loved one, but life cover can help ease the financial burden that the loss of a primary income leaves behind.
Decide what you’re looking for in life insurance, then use our comparison tool to find out which policy is a good option for you and your family.