Stepped Life Insurance Premiums
A stepped premium life insurance policy generally offers you lower premiums at the start but increase with each passing year. Although premiums start off relatively cheap, it is important to be aware that the premiums will eventually increase, and this can sometimes be substantial.
Published July 4, 2023
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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.
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.
Pros and cons of stepped premiums
| Advantages | Disadvantages |
| Cheaper in the short term | More expensive in the long term |
| Greater flexibility to switch insurers to find better value | Difficulty in accurately forecasting cost of insurance in the long term |
Options to reduce your premiums
1. The 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.
2. Insurers that offer the Premium Freeze Option
| Insurer | Age offered |
|---|---|
| AIA | 35 |
| AMP | No age specified |
| MLC | 30 |
| OnePath | No minimum and maximum entry ages |
| TAL | 30 |
3. Removal 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.
4. Reduce 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.
Frequently Asked Questions and Answers
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How are stepped premiums calculated?
A stepped premium is a type of premium in which the cost of your insurance is re-calculated each year according to your age at the time of your policy anniversary. Typically, that’ll result in a premium that gets more expensive as you get older each year. Premiums for level policies are calculated according to the age you were at the time of purchasing your policy. -
Are stepped or level premiums better?
This typically depends on your personal circumstances. Stepped life insurance policies are generally cheaper when you first purchase your policy while level life cover starts off more expensive but is generally more affordable in the long run. It’s generally a good idea to compare all of your options to find the right policy for you and your family. -
Can you change from stepped to level premiums?
Yes, typically you’ll be able to move from a stepped premium structure to a level premium structure without having to complete additional medical examinations or tests. Another option is to purchase a policy with a hybrid premium type which starts stepped and changes to a level policy later on.
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