Stepped vs. Level Premiums - What's the Difference?
Stepped and level premiums are two different ways to spread the cost of your life cover. Choosing the right option for you can really help with keeping premiums affordable.
by Gary Andrews
Last update 15 Aug 2021
Life insurance policies come in two forms or 'structures'.
They are: stepped premiums and level premiums.
Both options have their benefits and disadvantages.
It's up to you to decide which one is best for your current life stage.
To help you make your decision, we've compiled a comprehensive guide to stepped vs. level premiums.
Stepped premiums refer to life insurance policies that adjust to your level of risk.
A simple way to think of stepped premiums is: as you get older, your risk of severe injury or death increases.
Subsequently, your premiums will increase as well.
Buying a life insurance policy with stepped premiums means you'll usually pay a lower premium when you're young, and wind up paying more as you get older.
Once you buy a life insurance policy with stepped premiums, the insurer reevaluates your risk every year.
Most of the time, being one year older means your premiums will rise a bit every year you have the policy.
Stepped premiums don't always rise, however.
There are some instances where your risk can decrease over time.
If you change jobs, move to a safe area, or give up a harmful habit, you might see your stepped premiums go down when your insurer reevaluates.
Most people start a stepped premium plan by paying the lowest rate they'll see throughout the life of the plan.
If this is the case, buying a stepped premium plan may be the best way to protect your family or partner against your potential severe injury or death.
Life insurance is can be beneficial for anyone who has a family, but young spouses or parents often find it hard to afford life insurance.
Stepped premiums are one of the ways to purchase life insurance without breaking the bank.
The most significant negative of stepped premiums is their variability.
The policy will become more expensive as you get older -- assuming most of the other elements in your life have stayed the same.
If you move to a location that your insurance provider considers to be more dangerous, your stepped premiums may grow even higher than they did in the past.
While stepped premiums might be attractive at first, falling on financial hardship could mean the end of your life insurance plan when you get older.
It's impossible to know what the future holds -- which is one reason life insurance is critical -- and having a plan with stepped premiums could become more expensive than you can manage.
Level premiums are essentially the opposite of stepped premiums.
Instead of reevaluating your risk every year, the insurer will charge you the same amount of money for the duration of your life insurance policy.
Age has virtually nothing to do with level premiums, and insurers will charge you a base-rate that will last until you turn 65.
Once you hit that age, your insurer will likely transfer you to a stepped premium model, as your risk of severe injury or death will rise.
The largest benefit of level premiums is the security they provide.
If you have an insurance plan with level premiums, you don't have to worry about your premiums rising every year you have the plan.
You're protected a bit from financial hardship with level premiums because you know your risk factor won't rise unexpectedly when you hit landmark ages like 40 and 50.
Additionally, fixed premiums give you the ability to change or increase your coverage without incurring a substantial penalty on your premium.
After years of paying for your policy, the initial savings of a stepped premium may start to dwindle.
As your stepped premiums become more expensive than your level premiums, you'll find that, in many cases, long-term life insurance coverage costs less with level premiums.
The only disadvantage of a level premium life insurance policy is the initial cost.
If you're buying life insurance young, you'll almost always save some money by choosing a stepped premium plan.
Some people can't afford level premiums when they first purchase a life insurance policy.
They might be dissuaded by the high cost, and decide not to purchase it, particularly if they feel it may not be needed.
Depending on your financial security and position in life, either life insurance plan could work for you.
Stepped premiums are fantastic for those who are buying life insurance at a young age, but you need to ask yourself if you intend on keeping your plan for the foreseeable future.
If you are planning on keeping your plan, then level premiums may be the best option.
Over time, the rising cost of stepped premiums could outweigh that of level premiums, meaning you'll save money with level premiums in the long-run.
If, however, you need supplemental life insurance coverage for a short period, then stepped premiums may be the better option.
You can pay them off for a few years, then switch to a policy with level premiums when you start earning more money.
If you're over 65 and purchasing a new life insurance policy, the most viable will likely be stepped premiums.
At this age, your risk will substantially rise every year as health concerns come into play.
The most important thing is that you have life insurance.
If you can't afford the higher upfront cost of level premiums, stepped premiums are an option, too.
Insulating your loved ones from a devastating financial loss in the event of a tragedy is all that's important.
Young users without much disposable income may benefit from stepped premiums the most, but consider your intentions before you buy.
You should avoid gaps in life insurance coverage as much as possible, so plan ahead if you upgrade from stepped premiums to level premiums.
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This guide is opinion only and should not be taken as medical or financial advice. Check with a financial professional before making any decisions.