Life insurance – it’s an important choice. It’s the kind of financial decision that requires a fair bit of thinking about what you need today, and what you might need in the future. One of the key components in the life insurance decision is short and long-term affordability. Which brings us to our topic: Stepped and Level premiums – what’s right for you?
Stepped vs Level – what’s the difference?
The main difference is pretty straight-forward. Stepped premiums (“rate-for-age”) are age-related and increase as you get older, but are usually cheaper than Level premium insurance in the short-term.
With Level premium insurance, on the other hand, you don’t have to worry about increasing premiums as they remain steady throughout the duration of the contract. Level premiums are usually higher than Stepped premiums at the start of the policy, but lower in comparison in the longer term.
So, in a nutshell, with Stepped premium insurance you tend to save in the short term. With Level premium insurance, you tend to save in the long term.
You can also choose a ‘mix’ of stepped and level
There’s nothing like a real-life example to show the benefit of choosing the right premium type.
Around eight years ago, I helped one of my clients (a couple) set up a Life Insurance policy. After a thorough conversation, we decided to mix stepped and level premiums. The clients put a certain amount on Level, namely the amount that they felt they would like upon death. The remainder was stepped (therefore, set to increase with age).
This was a smart move. As stepped premiums increased and debt reduced, my clients could in fact gradually reduce their stepped cover (without touching the levelled amount, obviously). And in the meantime, they could also benefit from the short-term savings made thanks to cheaper stepped premiums.
As a result, as prices have gone up on the Insurances over the years, the stepped cover is nearly the same prices as level and so the savings are already seen.
What works best for you?
How can you choose what’s right for you? The choice between Stepped and Level premium insurance mainly depends on whether you think the level of cover you need may change, and in what period of time.
If you think you need a higher level of cover in the short to medium term, and a lesser level of cover down the track, then Stepped premium insurance could be an option for you. If, on the other hand, you think the level of cover you need won’t reduce, then locking in your premiums now and saving down the track with Level premium insurance could be more appropriate for your needs.
No crystal ball but good advice available
Please don’t hesitate to contact us: it’s our job to help you find the right fit for both the short and the long turn.
Of course, none of us know exactly what we’ll need in five or ten years. But sitting down with an adviser and talking through where you are at now, where you think you’ll be in the future and how the options stack up to your needs, is a good idea. Having some comparisons to consider is often the best first step in making an appropriate choice for your personal circumstances.
And with that in mind, we’re here to help and welcome you to get in touch if you’d like to compare Stepped and Level premiums and how they apply to your life insurance needs.
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