Stepped Life Insurance Premiums

Stepped premiums are available with all types of cover (Life, TPD, Trauma & Income Protection) and the most common type of premium style in Australia. Almost all Super Funds and Direct Polices offer only this type of premium option. Retail Policies, however, offers you the choice between stepped or level premiums.

When you take out a new policy, and you’re considering stepped premiums, make sure the stepped premium definition is clear, and you fully understand how the premium works before you purchase a policy.

What are stepped life insurance premiums?

Stepped premiums, also known as “rate of age” premiums, are usually cheaper in the early years and becomes more expensive with each passing year. Stepped premiums are calculated on your age and recalculated annually on the policy anniversary. Meaning, the older you get, the higher your premium price becomes, while your cover amount remains the same.

For example, let’s imagine you are currently 30 years old and taking out a stepped life insurance policy. Your cover is worth $500,000, and you are paying $50 a month. Now, let’s assume a year goes past. At age 31 you would pay $52.50 for the same $500,000 of cover. At age 32 you might pay $55 a month for the same cover and so on. Like a staircase, your premium goes up a step every year.

* The above example was calculated without CPI increases to the sum insured, meaning your premium will cost more if your sum insured also increases to keep up with inflation.

How are stepped life insurance premiums calculated?

Life Insurance companies calculate life insurance rates by age and other variables, like your smoking status, weight, etc. With stepped premiums, your life insurance will increase every year. Calculation: Entry age (and renewal age) time’s risk factor(s) time’s sum insured. In essence, it’s your mortality plus the cost of your cover amount to the insurer.

The increased price is to reflect your increased risk. As you become older, your likelihood of developing a critical illness, getting into an accident, becoming totally and permanently disabled or dying increases.

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Conversion of level and hybrid premiums to stepped premiums

Most insurers will convert hybrid and level premiums to stepped premiums at the age of 65 or 70; this is because you then present an even greater risk to the insurer.

Hybrid premiums are a combination of both stepped and level premiums; starting off on an elevated stepped premium structure, then converting to a level premium structure to help combat the premium price increases as you age.

Is stepped premiums a good fit for you?

This type of premium structure will generally suit people who only want cover for 3 to 7 years or people wanting to reduce their cover amount over the long term.

If you require a high level of cover for the short term, i.e. you have children dependent on you financially, and you need affordable premiums, then the stepped premium option might be an option for you.

AdvantagesDisadvantages
Cheaper in the short termMore expensive in the long term
Greater flexibility to switch insurers to find better valueDifficulty in accurately forecasting cost of insurance in the long term

Options to reduce your premiums

If your cover is becoming unaffordable, there are some options you can use to reduce the price of your premiums:

number-1The Premium Freeze Option:

If your premiums are becoming unaffordable, the premium freeze option can be used to freeze your premiums. Essentially your insured amount reduces each year, so your premiums do not increase.

The price your premiums will generally be frozen at the price they are on when your life insurance company receives your application to freeze your premiums.

number-2Insurers that offer the Premium Freeze Option

Insurer Age offered
AIA 35
AMP No age specified
MLC (called Economizer) 30
OnePath No minimum and maximum entry ages
TAL 30

number-3Removal of CPI Increases

Each year, your cover will automatically increase so it keeps up with inflation, which can impact on your premium price as well. If you want to reduce the cost of your premiums, simply write to your insurer requesting the increase not be applied.

number-4Reduce your cover

If after using the premium freeze option, and removing CPI increases you may want to look at reducing your level of cover before you consider canceling your policy altogether.

It’s natural to be attracted to the cheapest premium option available. However, it is wise to shop around and compare policies based on you and your family’s needs.

Published: January 24, 2017

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