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Stepped vs level insurance premiums
When considering to take out a
life insurance, income protection or trauma insurance
policy you have the choice of how you would like to
structure your insurance premiums either through stepped
or level premiums.
The most common option is stepped premiums - Stepped
premiums means that the premium increases with the life
insured’s age therefore as you get older and become a
higher risk to the insurance company your premiums
increase to reflect this.
The other alternative is level premiums - Level premiums
means that the premiums remain the same up to age 65,
after this time they revert to a stepped style premium.
Initially level premiums will be higher than stepped
premiums in the early years of the policy but over the
long-term it will be cheaper. The big advantage of a
level premium is that you know in advance what the
premiums will be and don’t find out later you can’t
afford the cover when you need it most. Case study
John who is
40 years old, has taken out a mortgage for $500,000 and
is considering taking out a life insurance policy to
cover him and his family should something happen to him.
John is planning on repaying his mortgage over a 25 year
period. John is thinking that he will need the cover for
at least 20 years or longer depending on his future
financial situation.
John is considering both
stepped and level insurance premiums
to
get an understanding of what will be the most
competitive option for him.
In John’s case his current stepped premiums for $500,000
worth of life insurance is $38.03/month, whereas for
level premiums it would be $83.40/month. The advantages
of the stepped premium is that right now the premiums
are more affordable, while the level premiums are more
expensive (i.e. more than double) in the long run they
will be cheaper.
Conclusion
Both level and stepped premiums are good options, however it depends on each persons situation to determine which option would suit them best. However should you be wishing to hold the cover over the long term level premiums is the more affordable option?
Disclaimer
The information provided
is general in nature and does not take into account
your particular insurance needs, financial situation
or investment objectives. We recommend that you speak to
an xLife risk advisor before you make any decision regarding life insurance. |
