Level Premiums or Stepped Premiums
Taking out life insurance doesn’t stop at choosing your policy. You also need to choose how you will pay your premiums. Often, you will be asked to choose between level premiums or stepped premiums.
What are Stepped Premiums?
Stepped premiums generally increase each year or with your age. This means that your premium will be re-calculated at the anniversary of your policy every year. This works on the premise that your health is more likely to deteriorate as you get older, therefore, your premiums also increase significantly.
However, stepped premiums are better over the short term because they will not increase as much. They are suitable for those who have limited disposable income and want short-term life insurance cover.
How Do Level Premiums Work?
Level premiums, on the other hand, stay the same even as you age. They are calculated based on your age when you are applying for cover. Even though you’re supposed to pay a fixed rate for the duration of your policy, level premiums may still change over the years. Some factors that may affect level premiums include inflation rate, Consumer Price Index (CPI) and increase in policy fees.
Level premiums are usually more expensive in the beginning, but will even out over time. They are suitable for those who want long-term life insurance cover.
What Factors Influence Your Premiums?
Your insurance premium will also be calculated based on the following factors:
- Your premiums will be more expensive the older you get. This is due to increased health risks associated with older people.
- Men generally pay higher premiums than women because they are more prone to certain medical conditions as they grow older.
- People working in an office usually pay lower premiums than those who work in high-risk environments.
- Health condition. Having pre-existing medical condition will generally increase your premiums.
- People with higher-than-average alcohol consumption and/or high Body Mass Index (BMI) pay much higher premiums. Those who smoke will pay almost double than non-smokers, regardless of how often they smoke.
- Skydiving, bungee jumping, parasailing and other dangerous hobbies can most certainly increase your insurance premiums as your chances in making a claim also increase.
Which Insurance Premium is Best For You?
Assessing your current and future financial needs is key to determining the right insurance premium type for you. Make sure to refrain from making hasty decisions and consider the following:
- Stepped premiums are suitable for those who have limited disposable income and want short-term life insurance cover. They are better for short term cover (for a period of 10 years or less) because they will not increase as much.
- Level premiums are suitable for those who want long-term life insurance cover. They are usually more expensive in the beginning, but you’ll be paying much less when you get older. This might not be advisable if you are expecting your salary to increase substantially in later years but are currently on a low wage.
- Hybrid premiums are becoming popular, although not all insurers offer them. They are similar to a variable interest rate loan with a fixed interest rate. They usually start off as stepped premiums for the first few years that help to accommodate your tight budget. They then change to level premiums at a later date that allows you to handle the premium better as you grow older.
We’ll Help You Find the Best Insurance Premium
At Makes Cents, we’re dedicated to helping applicants like you find the best insurance deals. We let you compare different insurance providers side by side so that you can find the policy that best fits your circumstances. So, start comparing today and get the best deal.