Comparing the Primary Premium Structures of Stepped and Level Premiums

If you’re looking for insurance and don’t know which premium structure is best, you’ll benefit from knowing the basics first. Life insurance is essentially an exchange of cash (premium payment) for the insurance company to carry the financial risk in the event of your death. Its purpose is the financial protection of your dependents in the event of your untimely death.

Your mission is to make sure you pay as little as possible for the level of cover you require.

Stepped vs. Level Premiums

Life insurance usually comes in two primary forms – a stepped premium structure and a level premium structure.

Stepped premiums are cheapest in the short-term, but increases every year, while your cover amount remains the same. Level premiums are higher upfront, but more affordable in the long-term; premiums are based on your entry age, therefore, premiums remain fairly consistent from the commencement of your policy to age 65 or 70, depending on your policy.

Case Study:

Derick is 36 and wants to take out life insurance cover for the first time. He plans on buying a property in two years and want insurance to cover the mortgage. He wants to hold the cover for the long term because he doesn’t want the hassle of having to change the cover. Upon investigation, Derick notices level premiums cost ($77.70 per month) almost double that of Stepped premiums ($44.87 per month) however stepped premiums are 3.2 times more expensive than level premiums in the long term. In this scenario stepped premiums will first exceed Level premiums at Age Next 46 and on a cumulative basis stepped premiums will first exceed cumulative level premiums at Age Next 52.

Cumulative Stepped vs Level Premiums

Age Cumulative Stepped Cumulative Level
36 $538.44 $932.40
40 $2,891.40 $4,662.00
44 $5,804.16 $8,391.60
48 $9,945.36 $12,121.20
50 $12,801.96 $13,986.00
51 $14,510.28 $14,918.40
52 $16,449.48 $15,850.80
56 $27,180.60 $19,580.40
60 $45,403.08 $23,310.00
64 $78,278.52 $27,039.60
65 $89,524.44 $27,972.00

Which is Better Stepped or Level Premiums?

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. Choosing the best premium structure for you is completely dependent on your specific needs and circumstances.

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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 level premiums might be for you if you want a policy for longer than seven years, as this is 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.

Alternatively, you can ask your insurer if they offer hybrid or optimal premiums. This premium style starts off in a stepped premium structure and then converts to a level premium structure up until your age 60 or 70 depending on your insurer.

Another option to consider is taking out a Stepped premium policy that has a Premium freeze feature; this allows you to freeze your premium price. Take note, to keep your premiums at the same amount, your total sum insured will decrease each year as you get older.

Can You Switch from Stepped to Level Insurance Premiums?

Yes, you can switch from stepped to level premiums without underwriting. However, you will never catch up to the full benefit of level premiums, like you would have had you started with a level premiums structure in the first place. Therefore, the sooner you make the switch to level premiums the better.

To make it easy for you to select the premium option that is best suited for you, 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.

Published: January 10, 2017
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