Stepped vs. Level Premiums: Which Insurance Option is Right for You? – 360 Financial Strategists

Choosing between stepped vs. level premiums can feel overwhelming. These payment options have their own pros and cons, and it’s important to pick the one that suits you best. In this guide, we’ll explain the differences between stepped and level premiums in simple terms.

Whether you want predictable costs, long-term savings, or flexibility, understanding these options will help you make the right choice for your insurance coverage.

These days, many people have life insurance in their super account. It’s a good safety net, but often, the amount of cover isn’t enough. A study by Rice Warner in 2020 showed that life insurance in super only covers about 65-70% of what people really need.

Since Covid, this number has gone up. It’s crucial to have the right amount of life insurance, whether it’s in super or not. You should check it regularly as your situation changes. What if something unexpected happens? How would your family manage? Would they be able to pay the mortgage or school fees?

Life insurance is a key part of your financial plan, but there are different ways to pay for it, which could save you money.

Stepped premium vs. level premium

The money you regularly pay for life insurance is called premiums. You can pick either a stepped premium, a level premium, or a mix of both.

With a stepped premium, you pay more each year. But with a level premium, you pay about the same every year.

At first, stepped premiums are cheaper. But over time, they can end up costing more than level premiums. Ironically, when you might think of canceling your policy because it’s getting too expensive, it’s probably when you need the insurance the most. This is usually when you have lots of expenses like a mortgage, childcare, or school fees.

Level premiums start higher but usually don’t change much over time. They might go up if your policy is linked to inflation or if you want more coverage.

The earlier, the better

If you get life insurance when you’re young, the payments are usually lower. This goes for both stepped and level payments.

Let’s say you’re a guy who doesn’t smoke and you want $1 million of life insurance. If you start the policy when you’re 30, a level payment is about 60% more expensive than a stepped payment at first. But if you start when you’re 40, it’s 120% more, and if you start when you’re 50, it’s 170% more.

But eventually, there’s a point where a level payment saves you a lot of money. This is especially true if you keep the policy until you’re 65.

If you start the policy at 30, you’ll start saving money after 23 years. If you keep it until you’re 65, you’ll save about $58,700 over 35 years. If you start at 40, you’ll save about $46,000, and if you start at 50, you’ll save about $10,000. But saving $10,000 is still good.

It’s a personal decision

There are a lot of reasons why you might pick a level payment, especially because it helps you know exactly how much to budget.

But for many people, starting with cheaper payments can make stepped payments more attractive. Also, if you only plan on having life insurance for a short time, like until your kids are grown up or your mortgage is paid off, stepped payments might be better.

Some insurance companies can give you a mix of stepped and level payments, which could help with your money situation.

Count on financial advisors to help you choose the best premium option for your needs. A financial advisor can guide you in making the right financial decisions.

To find out if our strategies are right for you, feel free to contact 360 Financial Strategists online or on 03 9427 0855.