Life Shield - Your Life, Your Protection, Personal Insurance

Stepped or Level Premiums?

When looking for the right Personal Insurance (Life Insurance, Income Protection, Total and Permanent Disability and Trauma Insurance) policy within Australia, it is important to consider which premium structure you would like to choose. Stepped premiums are great in the short term, though will end up costing you a lot more in the longer term than level premiums.

When discussing with clients, we always ask for how long they see themselves needing life insurances and income protection. If the answer is greater than 5-10 years, then it is worth considering a level premium structure for your new policy.

Normally you are only told about stepped premiums as these are the cheaper option, at least initially and therefore is easier for the broker to 'make the sale'. Stepped premiums are re-rated each year at renewal as per the client's age and therefore the cost goes up. The older you get, the higher the increase is. The problem here is, that once you are in your fifties and even sixties, the cost of your insurance will become so high that often clients are forced to either reduce their benefit or cancel the cover all together. This potentially leaves the client without the required cover at a time when they need it most.

Level premiums do not have age based increases and therefore do not have the dramatic increases in cost over time. In fact, the only increases in cost that you will have on your policy are due to CPI (Consumer Price Index - linked to inflation of between 3-5% pa) (and the sum insured will also increase each year by this amount) or general rate increases imposed by the insurer.

Level premiums give you the certainty of knowing what you will pay for your insurances up to age 65 in most cases and some insurance companies offer level premiums to age 70. Once you are of age 65 (or 70 if your policy allows), the premium will revert to a stepped premium structure and therefore begin to increase each year.

As an example, a male aged 40 with $300,000 of life insurance will pay approximately $28 per month (depending on which company is chosen) initially and a total spend up to age 65 of almost $45,000. On the level premium structure the same person will spend initially $58 per month however up to age 65 the total cost is less than half at $18,000 for the total spend over the period. (See tables below).

Ongoing Stepped vs Level Premiums

OnGoing Stepped Premiums

Total Stepped vs Level Premiums

Total Stepped Premiums

Initially there is the cash flow issue as you will be paying more than you need to, however in the longer term the cost of a level premiums structure will be well below what you would on a stepped premium.

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After having had my income protection, with a company based abroad, for the last 15yrs I recently decided to sort it here in Australia.(Now based here so it makes sense.)
Needless to say the thought of trying to get a similar product for a good price was a concern....

Dr S.T (BDSc)
Newman, WA.

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