Level Life Insurance Premiums

Unlike Stepped premiums, level life insurance premiums are the least common type of premium structure offered in Australia. Level premium policies are generally not available through Super Funds and Direct Polices. However, they are offered via Retail policies.

Level premiums are available for all types of cover, including Life, Trauma, TPD and Income Protection. It’s true that the level premium pricing is higher at the start of the policy. However it generally works out cheaper in the long run, especially when you are considering keeping the policy for 7+ years.

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To find out if the level premium structure is a good fit for you and your family, continue reading.

What is a level premium?

Level premiums are a type of premium available in Retail Policies in Australia and generally do not increase due to a change in your age up until the age of 65 or 70. However, their pricing can increase due to other factors, such as stamp duty and inflation.

Level premiums are generally cheaper in the long run, but it’s more expensive in the short term and should be seen as a long-term investment. So, if you take out a level premium at say age 36, you will pay more than if you had taken out a stepped premium. However, if you were to keep your level premium policy for at least 7 years, you’ll start seeing the benefit because your premiums will remain about the same. The graph below shows it will be worth the wait.

As the graph above indicates, level premiums start off more expensive but do not increase with your age. For the above stepped vs level premium illustration we have used a 36 year old male who has taken out $1,000,000 worth of life insurance up until age 65 where there has been no CPI increases to the sum insured or base rate increases.

However, level premiums are NOT fixed premiums. It’s important that you know, your level premiums can still go up, due to:

  • The life company changing the base rates
  • A change in stamp duty
  • A change in policy fees
  • A change in sum insured, e.g. you increase your cover by CPI

Level premiums inside super

You generally don’t find level premiums with group policies in super funds or direct life insurance policies. However, you can obtain level premiums by having a retail life insurance policy, which is owned and funded by your super fund.

How are level life insurance premiums calculated?

Level premiums are calculated on your age at the commencement of your policy and use this entry age to calculate your renewal premium even as you get older. With a level premium structure you pay more at the onset of your policy. Typically, level premiums will work out cheaper after about seven years, depending on your particular circumstances.

You will generally have the choice of premium style with all personal insurance policies including Term Life Insurance as well as Income Protection, Trauma and TPD Insurance.

What is the level premium period?

The level premium period on Retail Policies in Australia is generally to 65 or 70, depending on your policy. If insurers were to price Level premiums to age 80 or 90, premiums would become outrageously expensive. Thus they convert to stepped premiums at age 65 or 70.

So, imagine you had $500,000 worth of life insurance cover, and you’re paying a $300 monthly premium. When you reach that age of 65 or 70 (depending on the insurer), you’ll automatically revert to stepped premiums and jump to a much higher premium per month. Most people are not able to afford such a high premium, which is why they either cancel their policy or lower their cover amount.

We understand that not everyone is debt free at the age of 65, and you might want to keep a lower level of cover to pass on to the family or cover your funeral expenses. If that’s you, then perhaps keep your policy, but lower the cover amount, as at age 65 people rarely still have children to support financially.

Are Level Life Insurance Premiums the best fit for you?

The level premium structure might be for you if you’re ready to commit to a policy and want a policy for longer than seven – nine years, as this is when you’ll start to see the benefit.

If you can afford the level premiums when you take out the policy, then generally you should be able to afford it for the long term. By essentially investing in your premium price, it can help with your long-term affordability and budget.

Level Premiums

AdvantagesDisadvantages
Long term affordabilityMore expensive in the short term (can be 50% - 100% more expensive)
Financial StabilityLess flexibility to change your policy

Stepped Premiums

AdvantagesDisadvantages
Cheaper in the short termMore expensive in the long term
Greater flexibility to change coverLess financial certainty
Generally if you intend to hold your policy for a short period, stepped premiums may be more suitable. Other alternatives include:

Hybrid premiums

A mix of Level and Stepped premiums

Freeze premium option

Cover amount reduces each year, but policy price remains the same.

If you can afford the level premiums when you take out the policy, then generally you should be able to afford it for the long term. By essentially investing in your premium price, it can help with your long-term affordability and budget.

When considering a level premium structure, you are committing to that insurer for the long term, so it’s essential that you choose the right insurer. We recommend you start by requesting a level life insurance quote, so you know right away if it’s an affordable option for you.

Published: January 24, 2017
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