The Real Difference Between Stepped vs Level Premiums in 2023
Whether you’re purchasing a life insurance policy for the first time or updating your current cover, you may be wondering which premium structure will best suit your requirements. Stepped premiums and level premiums are two common options, but what’s the difference between them?
Published February 21, 2023
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The Difference Between Stepped vs. Level Premiums
Stepped premiums increase in price as you get older, Which one is right for you will depend on a few factors, such as how long you want your policy to last and your budget. Compare all of your options to find the premium structure that works for you and your family.
Premium Structures in life insurance
When applying for a new life insurance policy, the insurer will generally give you the option to choose between a stepped and level premium structure. Some insurers may also offer you the option to apply for a hybrid premium structure. Hybrid premiums start higher than a stepped premium, with rates increasing every year due to your age (similar to stepped premiums), and then converting to a level premium style once you reach a predetermined age.
Stepped Premiums
Typically, the most cost-effective option for life insurance is a policy with stepped premiums, where you are looking to keep the policy for the short term. Your premiums rise every year, while your coverage amount remains constant.
How are stepped life insurance premiums calculated?
Each year, your premium is calculated by taking into account your mortality (or morbidity)rate and the expense of your coverage amount. Your policy is renewed annually on your policy anniversary, whether or not the Consumer Price Index has been added to your sum insured (CPI). To calculate your life insurance policies premiums, the life insurers will generally multiply your entry age (or renewal age) by your risk factors and the total amount insured.
If you’re thinking about stepped premiums, keep in mind that, while the initial cost may be cheaper in the short term, you’ll end up spending a lot more over time if you retain your policy over the long term 7-10 years+. It’s generally to consider your own circumstances to make an informed decision.
Benefits of a stepped premium policy
- Generally more affordable in the short term
- Ideal if you don’t want long term cover
- Provides you greater flexibility to change insurance cover providers
- The younger you are when starting your policy, the cheaper your premium will be
Level premiums
Typically, level life insurance premiums are based on your entry age you were when you first applied for your policy. Generally, premiums that have a level structure are more expensive at first, they help you save in the long term as they do not increase due to your age only each year as you get older.
Opting for a policy with a level premium structure may help provide you with some peace of mind as you know premiums won’t get more expensive because of your age. However, it’s important to remember that your premiums are not fixed and may still increase because of stamp duty changes, CPI increases in your sum insured and changes in base rates from your insurer.
How insurers calculate level insurance premiums
When calculating your premium, your insurer will generally take the age you were at the time of applying for cover and apply that to their base premiums. Unlike a stepped policy, your insurer will not calculate your premium based on your current age. Typically, policies with this premium structure are more expensive when you first take out your policy, however, the total premiums are more affordable over the long term.
Benefits of a level life insurance policy
- If you maintain your policy for more than 7-10+ years, you’ll typically pay less than someone on a stepped premium structure.
- Provides you with some long-term security.
- Generally makes your life cover easier to budget for.
Compare Stepped and Level premiums
| Age | Stepped premiums | Level premiums |
|---|---|---|
| 56 | $73.29 | $164.24 |
| 57 | $91.96 | $164.24 |
| 58 | $107.18 | $164.24 |
| 59 | $123.38 | $164.24 |
| 60 | $140.84 | $164.24 |
| 61 | $163.88 | $164.24 |
| 62 | $188.90 | $164.24 |
| 63 | $215.36 | $164.24 |
| 64 | $245.96 | $164.24 |
| 65 | $286.28 | $164.24 |
| 10 year Cumulative Total | $19,644.36 | $19,708.80 |
Life Insurance Direct Comparison Engine (February 2023; Premium estimates for $200,000 of death cover with AIA Priority Protection Life cover Benefit for a 55-year-old non-smoking male living in NSW)
Hybrid life insurance premiums
Select insurers may offer members the option to select hybrid or optimal premiums. This premium style begins as a stepped premium structure and then converts to an elevated level premium structure once you’ve reached a predetermined age as outlined in your relevant quote.
Typically, you’ll pay this amount up until you reach age 60 or 70, depending on your insurer. Hybrid premiums are worth considering if you’re unsure of your future cover requirements. Or if you can’t afford level premiums in the short term but don’t want to pay higher stepped premiums in the long term.
How to choose the right option for your personal requirements
After you’ve decided to buy life insurance, you’ll want to think about how to organize your payments in order to best meet your and your family’s needs while still feeling secure that you can pay for the coverage for as long as you need it.
A life insurance broker will be able to assist you in determining the amount of coverage you require, show you how your premiums will vary over time, and help you select between stepped or level premiums or a combination of both.
Can You Switch from Stepped to Level Insurance Premiums?
Yes, generally, you’ll be able to switch from stepped to level premiums without underwriting. However, it’s almost impossible to catch up to the full benefit of level premiums, as you would have had if you started with a level premiums structure in the first place. Therefore, the sooner you make the switch to level premiums the lower the entry age, and subsequent premium. If you are intending to keep your cover for the long term.
To make it easy for you to select the premium option that meets your requirements, request an obligation, free stepped vs. level premium graph to illustrate for you the difference in premiums and the cumulative premium as each person’s situation is unique.
Frequently asked questions & answers
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What is the difference between stepped and level premiums?
Typically, the difference between stepped and level insurance premiums is the manner in which your monthly premiums are calculated each year. Stepped premiums increase each year as you get older. Level life insurance premiums on the other hand are calculated based on the age you were at the time your policy was purchased. -
Do life insurance premiums increase over time?
Yes, generally your premiums will increase over time if you opt for a life insurance policy with a stepped structure. If you’re on a level policy, your premiums may increase if your insurers base rates change, the sum insured increase for CPI increases or if stamp duties or policy fees change. -
Are life insurance premiums fixed?
No, term life insurance policies typically are not fixed. Your premiums may increase over time for several reasons. However, your insurer is required to inform you, in writing of any changes to your policy. -
Are stepped or level premiums better?
Typically, this depends on your personal circumstances. Stepped premiums are usually a good option for people who have a limited budget or only want to maintain cover for a shorter period. A level premium, on the other hand, is better if you’re looking for cover for the long term. -
How do premiums work?
A premium is an amount your insurance company charges for the policy you’ve chosen. Generally, you’ll have the option to pay your premiums fortnightly, monthly or annually. By paying your premium you ensure that your policy remains in force. Compare quotes to find a premium that suits your personal circumstances. -
What happens if you don’t pay life insurance premiums?
If you stop paying the premiums on your life cover your policy will typically lapse and you will no longer be able to make a claim. You may be able to reinstate your policy after it has lapsed. However, you’ll generally need to complete a full reinstatement application, which will go through underwriting. Your insurer will generally also require you to catch up on the payments which you missed.
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I will be turning 48 on my next birthday. I’m looking for a 300k life cover plan. Any advice on which premium type will best suit me; stepped level or hybrid?
Hi John.
Great question! I don’t know your specific circumstances and familial situation, but as a guideline stepped premiums generally start more affordable, but will increase each year as you get older. On the flip side, level premiums start off more expensive, but does not usually increase with your age.
Level premiums are usually the preferred option for those looking for a long-term policy, whereas stepped premiums are generally favored by young, singles looking for short-term cover before settling down and starting a family.
Hybrid premiums are only available from select insurers and usually start off on a higher than normal stepped premium style and then goes to a level premium structure when your premiums reach a pre-determined price.
If you need assistance, please do not hesitate to give us a call on 1300 135 205.