Life Insurance – Stepped and Level Premiums
There are plenty of decisions to make when taking out life insurance. You need to calculate how much cover you need, which insurance company you should choose and which specific policy to select.
Another decision to make is how you will pay your premiums. Of course you can choose to pay monthly or annually, but you must also choose whether you want stepped premiums or level premiums.
Never heard of stepped or level premiums? Don’t worry, as it is generally not something that most of us think about when taking out life insurance, but the option you choose can have a major impact on your premiums over a long period of time.
What are Stepped Premiums?
Stepped premiums are the most common form of premiums with life insurance, and in some cases it is the only option available.
With a stepped premium your life insurance cost will increase each year as you get older. The reason for this is that your risk of serious illness and death generally increases as you age.
What are Level Premiums?
Level premiums are far less common than stepped premiums, mainly because they can be considerably more expense initially.
Level life insurance premiums are not immune from all price increases, but they are certain not to increase due solely to your age. The may still increase if the insurance company decides to increase all base premiums, but they will not change due to your age.
The trade off is that level premiums are much higher initially than stepped premiums, however as the years go by the stepped premium will eventually exceed the level premium. As you continue to age the stepped premiums will continue to accelerate at an increasing rate, whilst level premiums will not.
Which is better?
There is no right or wrong answer when it comes to choosing between stepped and level life insurance premiums. The right option for you will depend on your own circumstances.
The time it takes for a level premium to become more cost effective than a stepped premium can be between five and ten years, so if you are considering level premiums you need to be planning on keeping your policy with the same insurance company for at least that long before you see any benefit.
A common problem with life insurance is that it starts to become much more expensive as you enter your sixties and seventies, which is exactly when people become more likely to claim on the policy.
A stepped premium will increase at a faster rate as you enter this age bracket to reflect your increased risk of death, however if you had chosen level premiums you would be paying vastly lower premiums.
If affordability is a concern you can start with a stepped premium and switch to a level premium at a later date, however this will further delay the point at which the level premium becomes more attractive.
Most life insurance companies now offer stepped and level premium comparisons to show you the differences in the premiums over a number of years. This can help you to decide which option is right for you.