When you take out insurance, there are generally two ways you can pay your premium:
- A stepped premium which is calculated each year in line with your age.
- A level premium which is calculated each year based on your age when the cover commenced.
Level premiums are higher than stepped premiums at the start. However over time, as stepped premiums increase, level premiums can end up cheaper – often at the stage in life when you need the cover most.
When deciding which option to choose, remember you could need insurance to cover your debts and income for 30 years or longer.
The Facts
Most claims occur in later years, but many policies lapse at this time due to higher stepped premiums. Selecting level premiums can make the cover more affordable in the later years and enables you to keep the cover going at a time when you need it most.
Combining stepped and level premiums
Just as you can opt for a combination of fixed and variable rate home loans, you may want to take out part of your insurance using stepped premiums and use level premiums for the rest. This way, the premium in the earlier years will be lower than if you opt entirely for level premiums.
Over time, you can then reduce your stepped premium cover as you build up more assets and potentially need less insurance. As a result, you could end up paying level premiums on most (if not all) of your insurance in the later years, and benefit from the lower premium costs associated with level premiums at that time.
Tips and traps:
• The earlier you ‘lock-in’ the level premium, the greater the potential long-term savings. This is because level premiums are generally lower if your take out the insurance at a younger age. However, as you approach age 65, the difference between the two premium structures diminishes for new policies.
• Level premiums can make budgeting easier, because you know in advance exactly what your insurance is going to cost.
• The maximum age you can start a policy with level premiums is generally lower than for stepped premiums.
