When taking out Life, Total & Permanent Disability (TPD), Income Protection or Trauma insurances, you have the choice of how the premium cost is structured and how much you will pay for your insurance cover over the life time of your policy.
Although there are a range of premium structures offered by insurance providers, the two most common are a stepped premium or a level premium.
There are advantages and disadvantages to both these options. It’s important that you understand how both work, so you can choose the structure that best suits you.
Stepped premiums are the most common way to pay that people choose to pay for insurance premiums.
Stepped premiums are calculated based on your age and recalculated annually on the policy anniversary. You pay for the risk associated with your current age which means that your premium will generally increase each year, as the potential for claim increases.
In essence, the older you get, the more you can expect to pay.
Stepped premiums are generally cheaper at the start of the policy which can make it more affordable to hold insurance in the short-term. However the disadvantage of stepped premiums is that the cost can substantially rise as you get older sometimes making it unaffordable to keep the same level of cover.
Stepped premiums may suit people who are only looking to keep cover for the short-term or who have cash flow restrictions and are looking for an immediate cost saving.
Level premiums provide a fixed premium cost that will remain constant until age 65 (except for increases relating to inflation).
Typically via a level premium you are likely to pay more at the beginning of a policy but the premium costs should average out over time, potentially saving a lot of money over the life of a policy. After age 65, a level premium typically reverts to a stepped premium.
A level premium ensures you know in advance what your premiums will be and you will not be faced with substantial premium increases on the policy anniversary date.
Level premiums are typically suitable for those people who plan keep a policy for the long term.
Stepped premiums may appear to be better since they’re cheaper initially but whether stepped or level premiums are the right solution for you will come down to assessing whether you would benefit now by the earlier affordability of stepped premiums or the longer term affordability of level premiums.
Working with a professional adviser can assist you review the options that suit you.