Stepped vs Level Premiums


There are many factors that contribute to the calculation of your insurance premiums. These include elements such as your gender, age, occupation, smoking status, level of cover and many more. However there is one aspect of your insurance premiums that can be controlled by you and that is the type of premium. Insurance policies are issued with either stepped or level premiums, each providing different advantages depending on your insurance needs.

As you get older, your insurance premiums increase. This is due to the that fact that you become more likely to suffer from an illness or injury. This is the case under a stepped premium. When your policy renews each year, your premium is recalculated based on the risk associated with your current age. Whilst these stepped premiums are initially less expensive, the increase in risk each year, especially as you reach older ages, can result in premiums becoming significantly more expensive and potentially unaffordable.

Level premiums lock in your premium based on the risk associated with your age at the time you take out the policy. Under a level premium, the premium you pay will remain constant throughout the life of the policy and will only increase if the benefit increases if the insurance company increases its rates (which can effect stepped premiums too) and when the level premium expires and reverts to a stepped premium (usually age 65 or 70). In the long run, level premiums might offer significant cumulative savings in comparison to stepped premiums.

Let’s say you take out your Income Protection insurance policy when you are 30 years of age. 20 years later, when you are 50, if you have a stepped premium, it will be significantly more expensive as your premium will be based on the risk associated with a person that is 50 years of age. Had you chosen a level premium, your premium should be significantly cheaper. Why? Because even though you are 50 years of age, your premium is calculated based on the risk associated with a 30 year old.

It is important to remember that not all level premiums offered by insurance companies are equal. This is where the expert knowledge of your adviser is essential in recommending the best policy for you. Most policies will only stay level up to a certain age at which they will then revert to a stepped premium, giving you a nasty shock when you receive that renewal notice where the premium becomes based on a 65 year old instead of a 30 year old. Other level premiums may not be a true level premium, whereby the indexation applied to your sum insured is not calculated based on your age at application but on your current age.

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