Stepped premiums
Stepped premiums are the most common way to pay Life Insurance premiums. They’re calculated on your age, with premiums generally increasing with your age. Premiums are typically higher the older you get, since you’re considered more likely to fall ill or be seriously injured.
Stepped premiums are recalculated annually at the policy anniversary. While they do generally rise as your risks rise.
Benefits
Stepped premiums ensure:
- A cheaper rate at the beginning of a policy, so more affordability in the short-term.
- You are only paying for the level of risk associated with your current age.
Disadvantages
- Your premium will rise substantially the older you get.
Level premiums
With level premiums, you pay more in the beginning, but the premium costs average out over time so that you can end up saving money. Usually a level premium remains constant until the age of 65, when it reverts to a stepped premium as your risks increase.
Benefits
Level premiums ensure:
- Security – you know in advance what your premiums will be so you can guarantee you can afford it in the future.
- A fixed price – the premium doesn’t increase annually and remains the same till the policy ends (except for modest yearly increases relating to inflation)
- The flexibility to increase your cover (and your premium) if you choose
- Long-term cost saving as your premiums stay the same, instead of rising steadily as stepped premiums do.
Disadvantages
- A higher cost at the beginning of the policy (but this price stays fixed for the length of the policy, unlike stepped premiums).
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