Stepped vs Level Premiums

When you purchase a life insurance policy, you typically have a choice between a stepped or level premium structure. Although stepped premiums may seem more affordable at first, they increase in cost every year. On the other hand, level premiums cost more initially however are based on your entry age at the time you commence the policy. Compare the two to determine which is right for your requirements.

Published May 17, 2021

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The Difference Between Stepped vs. Level Premiums

Stepped premiums are typically most affordable in the short term. However, your premiums increase every year, while your cover amount remains the same.

Level premiums generally cost more upfront but may be more affordable in the long-term as your premiums are based on your entry age. Therefore, premiums remain fairly consistent from the commencement of your policy until you reach age 65 or 70, depending on your policy.

Case Study:

Derick is a 36-year-old accountant who lives in Victoria, doesn’t smoke and wants to take out $1,000,000 worth of life insurance cover for the first time. He plans on buying a property in two years and would like insurance to cover his mortgage should he pass away. He plans to hold the cover for the long term because he doesn’t want the hassle of looking for a new policy.

Upon investigation, Derick notices level premiums for an AIA Priority Protection plan cost $112.10 per month. More than double that of Stepped premiums for an AIA Priority Protection plan cost $43.34 per month. However, as you can see if Derick’s intention is to maintain the cover for:

  1. 5 years, then level premiums could be 2.3 times more expensive than stepped premiums,
  2. 10 years, when level premiums could be 2 times more expensive than stepped premiums,
  3. To age 65, then stepped premiums could be up to 1.8 times more expensive than level premiums in the long term.

In this scenario, stepped premiums will first exceed Level premiums at Age 50 and on a cumulative basis, stepped premiums will first exceed cumulative level premiums at Age 57.

Cumulative Stepped vs Level Premiums

AgeCumulative SteppedCumulative Level

Source: AIA Portal (14 May 2021) Premiums calculated for a non-smoking male with no pre-existing conditions who pays monthly premiums and is based in Victoria.

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Are Stepped or Level Premiums Better?

When you purchase a personal insurance policy, including Term Life Insurance and Income Protection, Trauma and TPD Insurance, you generally get to choose which type of premium style will be included in your policy. Choosing the best premium structure for you typically depends on your specific needs and circumstances.

Level Premiums

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

Stepped Premiums

Cheaper in the short termMore expensive in the long term
Greater flexibility to change coverLess financial certainty

How to choose the right premium structure for you

Typically, level premiums are a good option for individuals to consider who are looking for long term cover. You may want to opt for this type of premium if you are thinking of keeping your policy for longer than seven – ten years. This is generally when you’ll start to see the long-term affordability benefit. However, if you only want cover for 3 to 7 years, then the stepped premium option might be a better choice for you.

Hybrid 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 premium. 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. 

Premium Freeze Options

Another option to consider is purchasing a Stepped premium policy with aPremium freeze feature; this allows you to lock your premium price at a set cost. However, it’s important to note that your total sum insured will decrease each year as you get older to keep your premiums at the same amount. Age eligibility applies with select insurers

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, like 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 better. 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.

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