When you take out life, income protection, or trauma insurance, you often choose between stepped and level premiums. This choice significantly affects what you pay over the life of your policy. Understanding how each option works and their long-term costs helps you make an informed decision.
The cheapest option today is not always the cheapest option over time.
How Stepped Premiums Work
Stepped premiums increase each year based on your age. When you first take out a policy, you pay a premium calculated on your current age. Each year, the premium recalculates based on your new age.
Young people pay relatively low stepped premiums because they are statistically less likely to die or become disabled. As you age, your premiums increase to reflect higher risk.
The increases are automatic. You do not need to do anything; your premium simply rises each year at renewal.
How Level Premiums Work
Level premiums stay the same throughout your policy term. The premium is calculated based on your age when you start, spread across the expected policy duration.
Because the premium accounts for higher risk years in advance, level premiums start higher than equivalent stepped premiums. However, they do not increase with age.
Level premiums may still increase due to CPI adjustments or if the insurer adjusts rates across all policies, but not due to your personal ageing.
Comparing Costs Over Time
In early years, stepped premiums are lower. If you plan to keep cover for only a short period, stepped premiums cost less.
As you age, stepped premiums rise and eventually exceed level premiums. The crossover point varies but is often in your forties or fifties.
Over a full working lifetime, level premiums often cost less in total despite the higher initial payments.
When Stepped Makes Sense
If you plan to reduce or cancel cover in the next 10-15 years, stepped premiums may cost less over that period.
If cash flow is tight now but you expect it to improve, starting with lower stepped premiums and reassessing later can work.
If you are uncertain about your long-term insurance needs, stepped premiums provide flexibility without long-term cost commitment.
When Level Makes Sense
If you plan to maintain cover until retirement or for decades, level premiums typically cost less overall.
If you want predictable, stable premiums for budgeting, level premiums provide certainty.
If you are young and healthy, locking in level premiums now protects against future premium increases.
The Affordability Trap
Many people choose stepped premiums because they are cheaper initially. As premiums increase over years, the cover becomes expensive just when reducing cover feels risky.
Some people reduce or cancel cover in their fifties because stepped premiums have become unaffordable. This leaves them without protection during potentially high-risk years.
Consider whether you can afford premiums in your fifties and sixties, not just today.
Hybrid Approaches
Some policies allow you to mix stepped and level premiums. For example, life insurance on level with income protection on stepped.
You can also start with stepped premiums and convert to level later, though this recalculates the level premium based on your age at conversion.
Some people reduce cover amounts over time as their needs decrease, managing stepped premium increases by reducing the sum insured.
Making Your Decision
Model the costs over your expected cover period. Your adviser can show you projected premiums at different ages for both options.
Consider your budget now and in the future. Can you afford significantly higher premiums in 20 years?
Think about your likely behaviour. If rising premiums might cause you to cancel cover, level premiums could be safer even if costlier initially.
Annual CPI Adjustments
Many policies offer annual CPI increases to keep your cover relevant with inflation. These increase both your cover and your premium.
CPI adjustments apply regardless of whether you have stepped or level base premiums. They add an additional increase each year.
Consider whether CPI adjustments are worthwhile for your situation. They maintain cover value but add to premium growth.
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