Premium Options

You can structure your premiums in a number of ways when taking out life insurance. There are various premium options.

Stepped premiums
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. However, if 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.