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Stepped vs Level Premiums: Which Is Better?
Written by Safety Nest
The short answer
Stepped premiums start lower and rise each year as you get older, while level premiums start higher but are designed to rise far more slowly over time. Neither is automatically "better." Stepped tends to suit shorter-term needs or tighter early budgets, and level tends to work out cheaper if you hold the cover for many years. Below is how each one actually behaves, including the part most people get caught out by: a level premium is not completely fixed.
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Stepped vs Level Premiums Explained (Australia)
Read the transcript
Stepped or level premiums. What's the difference? Stepped premiums generally start lower and rise as you get older.
Level starts higher, but generally rises more slowly. And which one you choose affects how much you pay now, and in the future. The names have changed too.
Moneysmart now uses new ones, and they tell you something. But first, there are three catches most people don't know about. Let's walk through it with Jess, our example.
Jess has a mortgage and two young kids, and she's choosing how to pay for her life insurance. Option one is stepped. Moneysmart now calls it "variable age-stepped".
The premium is based on her age, and recalculated at each policy renewal. So it generally goes up as she gets older, because there's a higher chance of making a claim as you age. Option two is level.
Moneysmart now calls it "variable". It charges a higher premium at the start, but changes to the cost aren't based on her age. So what's the catch?
Here's the first one. Level doesn't mean fixed. Even Moneysmart's new name for it is "variable".
Whichever way she pays, Moneysmart says premiums are not guaranteed and may change annually. The second catch: the lower start isn't the whole story. Stepped is recalculated at each renewal as Jess gets older, so the lower start may not last.
The third catch is time. Level costs more at the start. Whether that pays off may depend on how long she keeps the policy.
And insurers set premiums based on things like age and health. So a new policy later would be priced on her age and health then, not now. So it's a trade-off.
Neither one is better for everyone. So which may suit Jess? If she expects to keep her life insurance for a long time, level may cost her less overall.
If money's tight right now, or she only needs it for a shorter time, stepped may suit her better. Either way, her premium can still change. It's worth knowing which one she has, and why.
Think about yours. Do your premiums rise with your age or not? And what other increases could happen each year?
Not sure what yours says? We can go through it with you. We're Safety Nest.
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What is a stepped premium?
A stepped premium is recalculated each year based on your age. Because the chance of a claim rises as you get older, the premium steps up every year, usually slowly at first and then more steeply later in life. The appeal is a lower starting cost, which is helpful if money is tight now or you only need the cover for a defined period, such as while a mortgage is being paid down.
What is a level premium?
A level premium is calculated to stay much more stable over time by effectively averaging the cost across the years you hold the policy. You pay more than stepped in the early years, but the cost does not climb steeply with age in the same way. Over a long holding period, that can mean you pay less in total.
How premiums move with age
The same cover, two very different paths
Stepped starts cheaper but climbs every year as you age. Level starts higher and stays far flatter. Hold cover long enough and the lines cross, after which stepped is the dearer of the two.
Common misconception: "level premiums never increase"
This is the question we hear most, and the honest answer is that level premiums can still go up. "Level" refers to the fact that the price is not driven up by your increasing age each year. It does not mean the price is frozen forever. Premiums can still change because of indexation (your cover amount automatically rising each year to keep pace with inflation, which costs more), and because insurers can re-rate premiums across a whole product group. So a level premium is much more stable than stepped, but "level" is not the same as "fixed."
Why did my premium go up even though it is level?
The two usual reasons are indexation and a product-wide re-rate. If your cover increases automatically each year, the premium for that larger amount of cover naturally rises. Separately, an insurer can adjust the underlying rates for a product group. If your level premium has jumped noticeably, it is worth having someone review why before you assume you are stuck with it.
At a glance
Stepped vs level, side by side
Neither is automatically better. It depends on how long you will hold the cover and your budget now.
Stepped
Lower now, climbs with age
- Starting cost
- Lower
- Over time
- Rises every year with your age
- Can still rise?
- Yes, and steeply later in life
- Tends to suit
- Shorter needs or a tight early budget
Level
Higher now, far flatter later
- Starting cost
- Higher
- Over time
- Much more stable (not frozen)
- Can still rise?
- Yes, via indexation or a product re-rate
- Tends to suit
- Cover held for many years
Which is better for me?
It depends on how long you expect to hold the cover and your budget now. As a general guide, the longer you keep a policy, the more a level structure tends to favour you, while stepped can suit shorter horizons or a tight early budget. The right answer depends on your age, your cover amount and how long you need it, which is exactly the kind of thing worth talking through with an adviser rather than guessing.
FAQs
Frequently asked questions
Do level premiums ever increase?
Yes. Level premiums are designed not to rise with your age each year, but they can still increase due to indexation of your cover amount and because insurers can re-rate a whole product group. Level is much more stable than stepped, but it is not frozen.
Why did my level premium go up?
Usually because your cover amount increased through automatic indexation, or because the insurer adjusted the rates for that product. A review can confirm the cause and whether better options exist.
Is level cheaper than stepped?
Often over a long holding period, yes, because stepped premiums climb steeply with age. Over a short period stepped can be cheaper because it starts lower. It depends how long you keep the cover.
Can I switch from stepped to level later?
It is sometimes possible, but switching can involve fresh underwriting and the level price is based on your older age at that point, so it is usually more expensive to start level later. It is best reviewed case by case.
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