What would become of your family's financial position if you had died yesterday? Will they be able to meet important financial commitments like mortgage repayments, child care, education or even the most basic of necessities such as food? Would your family be able to maintain their quality of life or would it suffer a serious downturn?

This is where life insurance can assist, by providing a lump sum in the event of your death, which your dependants can use to help meet immediate or ongoing financial commitments. As with all forms of insurance, life insurance is there for your peace of mind. So when it comes to paying for this peace of mind, a little forward planning and research may save you a significant amount in premiums in the longer term.

Premium options.

You can structure your premiums in one of two ways when taking out life insurance: stepped or level premiums.

Stepped premiums are linked to age so the premium rate increases, or 'steps-up', each year in line with risk.

Level premiums generally remain fixed throughout the duration of your policy, however, unlike stepped policys they have a predefined end date which is established at the commencement of the policy. Level premiums are therefore not only determined by the amount of cover you require and your entry age, but also the duration of your policy. Your premiums are effectively averaged out over the life of the policy.

Stepped or level premiums?

The answer to this question depends on your personal circumstances. At first glance, stepped premiums may seem appealing, as they are the cheapest option at entry stage, in contrast to level premiums, which are likely to have much higher payments early on.

Yet as time goes by, stepped premiums will eventually overtake level premiums and can become more unaffordable around the same time your chances of claiming become more likely (typically between the ages of 40-55 according to claims history). In contrast, level premiums provide greater savings in later years, making your premiums more affordable just as your chance of making a claim increases.

If you have short term cover needs go with stepped premiums. If however, your needs are long term, you will probably be better off with level premiums. If you are in doubt, ask your adviser for a stepped verses level premium comparison where you will be able to identify the break even point and also the cost savings in the longer term.

The best of both worlds!

An increasingly popular option - much like a mortgage combining fixed and variable elements - is to take out two policies, one with stepped and one with level premiums. This way, you can take advantage of both the initial stepped discounts and the long term level savings. As you get older and have less financial commitments, you can reduce your cover by cancelling part or all of the stepped policy, while continuing to pay the level premiums which are cheaper.

Whether you choose stepped or level premiums, or a combination of the two, it is always important to ensure you have a sufficient level of protection to cover any financial obligations in the event of your death.

While nobody thinks it will happen to them you should "Plan for the worst and hope for the best". Organise your insurance today.

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