The simplest explanation of stepped vs level premiums is that stepped premiums increase with age and level premiums do not. Generally, the fixed rate level premium option starts off slightly higher than the stepped option, but if you hold a level premium policy for several years there can be substantial savings.
A general rule of thumb might be that over an eight-to-ten-year lifespan of an insurance policy you would roughly break even with each different structure, but over a longer term you might be significantly better off with a level premium policy.
A couple of caveats on this are that even if you have a level premium structured policy, prices can still increase if your insurance company increases the price of its insurance. Plus, your cover amounts can increase with inflation and premium amounts increase as cover increases.
But even in taking these into account, with level premiums, the largest variable, age influenced premium increases, is locked in at the time you take out your policy.
Let’s now look at a price example, provided by an insurance consultant at SMFS Insurance Partners, to give some greater clarity around this discussion.
The total amount of cover is not detailed here as the example is designed to show an indicative difference between two types of premiums, stepped and level.
William, is a 36-year-old father of one who is taking out life insurance for the first time, mainly with the thought of being able to cover the mortgage on the family home for his family, in the event of anything untoward. Upon investigation with a consultant, he notices that level premiums initially cost $77.70 per month as opposed to stepped premiums which initially cost only $44.87 per month. Well, if his investigation stopped there, the choice would be simple.
But upon closer examination he can see from the chart below that if he chooses stepped premiums, although cheaper now, they would exceed level premiums by the time he is 46—that’s only ten years away? Furthermore, on a cumulative total basis, the amount he would spend on stepped premiums would exceed the total amount he would spend on level premiums by the age of fifty-two, that’s pause for thought. Hopefully at that age, William would still have a long life ahead of him, and would undoubtably have ongoing insurance needs. He now realises he needs to make sure he is considering all likely premium scenarios, and make the right choice for his financial situation and his families security needs.
| Age | Cumulative Stepped | Cumulative Level |
| 36 | $538.44 | $932.40 |
| 40 | $2891.40 | $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 |
Can you switch from stepped to level premiums?
Well, yes you can, but it involves cancelling your existing cover and taking out a brand-new policy. Also be aware that, especially the longer you leave it, you will never catch up to what you would have paid with level premiums had you started on them in the first place. Additionally, if you have had a medical condition between taking out your existing cover and trying to change to level premiums, cover may not be offered on the same terms or might not even be offered at all, so there are significant risks involved in trying to convert to a level premium structure down the track.
Now, as with all information published on our website, the information and examples here are of a general nature only.
Your life situation is unique to you, and likely your insurance requirements, around the choice of stepped or level premiums are to. In our experience all aspects of insurance need to be tailored to your needs.
Our insurance consultants at SMFS Insurance Partners can give you important information around your options. We also draw upon a competitive, wide ranging platform of insurance providers to save you time and energy in achieving the best results possible. Call us today on (07) 3064 0413 or leave us a message using the convenient contact us page on our website.
