Life Insurance Premium Structures

When shopping for life insurance in Australia, it's important to know about the two different kinds of premium structures available: stepped and level. A stepped premium structure allows you to pay less initially, with prices increasing over time, while a level structure starts at a higher payment that remains roughly the same over time. Although stepped premiums can be cheap up front, you will end up paying more in the long run than if you choose level premiums.

Before you decide firmly on one of the other, consider that they are each useful for different purposes. For example, a younger person who only needs life insurance for a short period of time (such as a single parent who wants to ensure that there will be money left to care for their child) may benefit from the smaller initial payments of a stepped premium. However, if you'll need life insurance for longer than 5 or 10 years, then level premiums may be the best choice for you.

Insurance brokers often introduce stepped premiums first, without mentioning level premiums at all, since these are cheaper at the beginning and are often easier to sell. A stepped premium is a premium which is re-rated each year based on your age. Because of this, the cost goes up fairly consistently each year: the older you are, the higher the increase.

This is good while a person is young, but by their fifties or sixties they will wind up paying so much in premiums that they either need to reduce their benefit or cancel coverage, which leaves them vulnerable when they most need insurance.

Level premiums, on the other hand, are not age-based, and therefore do not increase over time except as a result of the Consumer Price Index (CPI) which is linked to inflation and will increase only a small amount each year. With level premiums, you have the security of knowing that your insurance costs will be manageable until age 65, at which point it will revert to a stepped structure.

For example, let's assume there is a 40 year-old man with $100,000 of life insurance. With a stepped premium structure, he will pay about $15 per month initially, but because his premiums increase each year, and at 65 he will have spent $15,000 total in premiums. If he were to choose a level premium structure, however, he will spend $24 per month, but since the premium increases are much less dramatic, he will only spend around $7000 total by age 65.

Because the initial price of a level premium structure is somewhat higher, it's good to carefully consider how long you'll need insurance: if you'll only need it for a few years, a stepped plan may be the best option for you. However, if you plan to have insurance for a long time, try to get a level structure so that you're able to maintain coverage for the best possible price over the term of your policy.