Stepped vs Level Premiums for Life Insurance – A Comparison

Comparing Stepped vs Level Premiums for Life Insurance LifeCovered

The definition of Stepped vs Level Premiums is: Stepped Premiums are recalculated annually and increase as you get older, but usually start cheaper. Level Premiums are generally higher than Stepped Premiums but considerably lower in comparison over time.

We all know someone who has died. What better way to leave your loved ones than with a life cover, that pays a lump sum to your loved ones.

I think it is noble.

Because your loved ones may reap financial benefits for generations to come.

But this is where things become blurry and hard to understand.

Because once you have decided to purchase life insurance, then you need to start thinking how you want to pay for it.

There are only two ways to pay for life insurance in New Zealand. The two premiums payment structures are called:

Stepped vs Level Premiums.

Or Rate for Age vs Fixed Premiums.

Increasing Premiums vs Premiums that don’t increase with age.

Banks and many online insurance companies do not offer level premiums, and will not tell you about Level Premiums.

They offer only stepped premiums, at a competitive rate, because they have trimmed the product to a basic shelf product.

The best life insurance companies in New Zealand offer stepped premiums and automatic conversion options to level premiums if you should decide to do so at any time. Without any further health assessment naturally.

Understanding stepped vs level premiums is paramount in determining how much you will be paying now, tomorrow and in the future.

For life insurance and trauma cover, you have the option to choose between stepped and level premiums.

Testimonial from Kathrine

About Willi

Willi is a Life Insurance Specialist, who focuses on protecting family and business from financial risk.
Willi has more than five years banking and life insurance experience in Europe and moved to NZ 2014 and has now established himself in Hamilton, where he lives with his Wife, Daniela and two children: Andrew & Laura. He is a founding member of Rotary Rototuna, a community services club.
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Stepped Premiums Definition

Stepped premiums, also known as rate for age, are a great cost-effective way to get started with life insurance.

It is very important to understand that Stepped Premiums do increase with your age, but usually cheaper than Level Premiums in the short term. At the anniversary of the policy, banks and insurance companies recalculate the amount you pay for life insurance.

Generally speaking, premiums increase year upon year because the likelihood of you making a claim rises every year.

There are exceptions.

Sometimes premiums can drop if you have stopped smoking or if you work in a less hazardous environment or maybe your health has improved.

Transitioning into family life for a young man is also a change in your circumstances.

These are all circumstances that if your insurer would reevaluate your policy, could mean lower premiums.

Level Premiums Definition

Level Premiums don’t increase with age.

Fixed life insurance premiums is a type of term insurance where the premiums stay fixed for a certain term.

Premiums are higher in the beginning but lower over time compared to stepped premiums.

Stepped Premiums Advantages

Stepped vs Level Premiums start lower and are therefore more economic or budget-friendly to start off with.

Consequently, Stepped Premiums are a good affordable start getting financial protection for yourself and/or your family.

For many young people and young families, Stepped Premiums might just be the right solution because a life cover policy is within reach. Level Premiums might just put too big a stress on the family budget.

Often income rises as you age and you might afford Level Premiums later since they start higher.

Stepped Premiums Disadvantages

Definitely, the longterm exponential price increases, because as you get older premiums become unaffordable.

As a result, many are forced to reduce life cover or cancel when they need it the most.

This is really absurd and contradictory to the purpose of having personal financial protection.

My thoughts anyway.

Stepped vs Level Premiums Comparison from Fidelity Life

Stepped vs Level Premiums Comparison from Fidelity Life

Level Premiums Advantages

Level Premiums are also known as term life insurance, and premiums remain the same during the term of the contract. Comparing Stepped vs Level Premiums paid for this sort of a policy, premiums will be higher in the beginning and remain the same, whereas Stepped Premiums might have doubled many times throughout the same period.

Level Premiums stay fixed during the term, which means life insurance premiums that don’t increase with age remain the same until your age 65, 70, 80, 90 or 100.

Worth noting here is that the longer you want life insurance premiums that don’t increase with age, the higher they are initially.

An example is if you want $100.000 life cover policy fixed until your age 70 and another life cover policy fixed until your age 100, the premiums per fortnight, for the later policy will be higher.

Level Premiums Disadvantages

I would say the greatest disadvantage with Level Premiums is that you pay a higher cost now when comparing Stepped vs Level Premiums.

That makes Level Premiums for many people harder to afford.

Maybe in another couple years, Level Premiums are more affordable.

That is why it is so important to initially start with a life insurance company that offers hassle-free policy conversion from Stepped to Level Premiums.

Stepped vs Level Premiums: Policy Wording Comparison

The Policy Wording document is an essential document and stipulates how the legal agreement between the parties, insurer and insured will be enforced. Therefore examining the policy wording gives us a better understanding of what it is we are actually buying.

In the following three examples, I am examining the Policy Wording for Asteron Life, Fidelity Life and Bank of New Zealand (BNZ).

Stepped vs Level Premiums: Policy Wording Comparison – Stepped Premiums

Asteron Life

Stepped premiums increase over time.
We recalculate them every year on your policy anniversary. We advise you of the new premium in writing.
AsteronLife will base your new premium on:
• our stepped premium rates at that time
• the insured person’s sex, occupation, smoking status and any premium loading factors that we have agreed
• any discounts you or the insured person qualify for
• the amount of cover (or sum insured) you have at that time; and the insured person’s age on their next birthday.

You can choose to increase your amount of cover each year, so it stays consistent with inflation. If you choose to do this, you will pay additional premium for the additional cover being added.

Comment:

Asteron Life recalculates premiums on your policy anniversary based on above criteria.

Fidelity Life

Policy Wording coming….

BNZ Life will calculate the premium on each Anniversary Date based on:
› the amounts of the Benefits;
› premium term selected
(note – Permanent Disability Benefit, Temporary Disability Benefit and the Redundancy Benefit, must have a premium term of one year);

› the Insured’s then age, gender and smoking status (premiums will generally increase with age);
› any additional premium loading agreed to by both Policy Owner and BNZ Life; and
› BNZ Life’s table of premiums and policy fees then in force.

BNZ Life may in its absolute discretion, recalculate the premium at anytime (including any time which is not an Anniversary Date) if BNZ Life’s table of premiums and policy fees is revised in respect of all insureds with like cover.

Bank of New Zealand – BNZ Life must give the Policy Owner not less than 60 days notice of any change in premium which will come into force at any time other than an Anniversary Date.

Comment:

Bank of New Zealand (BNZ) recalculates premiums annually based on above criteria and may in its absolute discretion, recalculate premiums at anytime, including the policy fees.

Stepped vs Level Premiums: Policy Wording Comparison – Level Premiums

Asteron Life

Level premiums stay the same each year until your level premium term expires.
They will not increase during this time unless:
• you choose to increase or decrease your amount of cover
• you choose to change your payment frequency from yearly to half-yearly, quarterly, monthly or fortnightly
• we change the premium rates because of the cost of providing protection (we won’t ever do this for level premiums on Life Cover)
• we change the premium rates because of increases to government taxes or charges (section 11.3.2, 11.3.3)
• you choose to increase your amount of cover each year in line with inflation.
If you choose to do this, you will pay additional premium for the additional cover being added

Comment:

Asteron Life guarantees never to increase level premiums. The exception is if the government increases taxes or charges and you have the option to inflation adjust the amount of cover.

Fidelity Life

Policy Wording coming….

Fidelity Life - CPI adjusted level premiums - LifeCovered
Source: https://www.fidelitylife.co.nz/life-assurance/

Bank of New Zealand (BNZ)

Bank of New Zealand does not offer Level Premiums.

Stepped vs Level Premiums: Nostalgia and Inflation

The Reserve Bank of New Zealand defines inflation

as the term used to describe a rise in average prices through the economy. It means that money is losing its value. 

Inflation in New Zealand is measured by the Consumer Price Index also CPI and published by Statistics New Zealand.

When buying life insurance, stepped or level premiums, you can choose to CPI-inflation adjust your policy.

Afterall, we know $250.000 today and $250.000 20 years ago does not equal same buying power.

The following two examples demonstrate stepped vs level premiums and non-inflation vs inflation adjusted policies.

Stepped vs Level Premiums: Example #1

Stepped vs Level Premiums - NO CPI

The above chart shows how stepped vs level premiums develop for a 41-year old, none smoker male until age 80. Based on numbers from Asteron Life.

Life Cover is $250.000, fortnightly payment.

Please note, these figures are without inflation adjustment.

Actual numbers based on January 2018 prices.

AgeSteppedLevel to 80
41 $30.19$78.97
46 $43.97 $78.97
51 $73.72 $78.97
56 $124.03 $78.97
61 $236.03 $78.97
66 $463.31 $78.97
71 $942.81 $78.97
76 $1,584.19 $78.97
80 $2,358.13 $78.97

Stepped vs Level Premiums: Example #2

Stepped vs Level Premiums - CPI Adjusted

The above chart shows how stepped vs level premiums develop for a 41-year old, none smoker male until age 80. Based on numbers from Asteron Life.

Life Cover is $250.000, and Trauma Cover is $100.000

Please note, these figures are WITH CPI inflation adjustment.

Actual numbers based on January 2018 prices.

AgeSteppedLevel to 80
41 $54.71 $152.28
46 $100.26 $169.40
51 $199.76 $197.15
56 $393.11 $247.56
61 $802.61 $334.35
66 $1,687.20 $484.80
71 $3,254.98 $684.91
76 $4,123.86 $733.86
80 $6,908.13 $1,037.14

Actual Life Cover starts at $250.000 and at age 80 due to CPI Life Cover is $530,575

Actual Trauma Cover starts at $100.000 and at age 70 due to CPI Trauma cover is 174,102

Notice: In this example I have selected Trauma cover until year 70. Hence the relatively drop in premium increases from age 70.

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Stepped vs Level Premiums: Which one is right for me?

There is no one-size-fits-all with life insurance.

Stepped vs level premiums is about your short- and long-term financial goals, current assets, debts, cash flow and your approach to risk.

It comes down to estimating stepped vs level premiums vs short- and long-term affordability and goals.

And both premium structures have their advantages. It depends on your circumstances.

Stepped premiums could be the better option for you if you are planning on keeping insurance for a short period.

If you want certainty and long-term affordability, Level Premiums could be right for you. Especially if you are struggling with exponentially growing premiums.

Another option is to combine both premium structures.

Contact me.

It’s free……well not really…..In life, there are no free sandwiches. We all know that.

But if we end of doing business together, you should know, that the insurance company will pay me a commission.

You get the same price if you work with me as a broker or work directly with an insurance company.

As an advisor, I work with all leading New Zealand Life Insurance companies because not every company can cater to everyone’s needs.

You are welcome to comment below, and I will try to answer your questions regarding Stepped vs Level Premiums.

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2018-02-14T22:00:56+00:00