Stepped Life Insurance premiums
A stepped premium that increases each year in line with your age. This is the most common form of premium payment and can be the most expensive – Long Term!
Decreasing Life Insurance premiums
A decreasing cover where the premium stays the same each year while the benefit reduces. Essentially a fixed price for reducing benefits. This what you get with most industry super funds. Not the best solution for most people.
Level Life Insurance premiums
A level premium to age 65 is generally the best way to buy your cover for the long term, although beware some insurers can still increase their rates. That is, premiums will only vary if a change is made to premium rates by the insurer. The Insurer cannot increase your premium even if you claim. The good news is there are a select few Life Insurance companies who provide guaranteed level premiums till age 65. This is new for the Australian Life Insurance market.
While stepped premiums offer the cheapest form of Life Insurance in the early years, in the long term, as the risk of you claiming increases the premiums start to substantially increase. Check out our case study. The idea is that when you will most likely claim you won’t be able to afford the premiums! To stop this from occurring you can buy a level premium which is usually double the stepped premium in the first years, and this usually scares most people off, although if you want the cover for the long term it will be the most cost-effective option!
In summary the idea is you need to commence your policy on level premiums as young as you can. That way you lock in the cheaper premium. This will reduce your cost for the long term.
Case Study – Level Life Insurance Vs Stepped Life Insurance
John, age 38, needs to provide $1,000 per week for his young family, has a wife that does not work and two young children under the age of five. This $1,000 per week will just meet the living expenses. They also need to pay out their home mortgage of $500,000. John believes he will need his full 25 years to pay out his home loan. We discussed the need of cover and John likes the idea of keeping the cover to age 65, so level is a great option. Furthermore when he locks into a level rate we calculate he will save over $440,000 in premiums between stepped and level.
Just have a look how expensive stepped insurance premiums really are after age 60! At their most expensive he will pay over $90,000 in just one year!
Example: Life, Total and Permanent Disability, for male age 38, smoker.