What is level premium life insurance?
Level premium life insurance¹ don’t go up because of your age. Instead, level premiums are calculated according to your age on the date your cover starts and not as you grow older. So your trade-off is a higher price in the early years of the policy for savings when you hold the policy cover over a longer time, often at the stage in life when you need the cover most.
Your level premium life insurance ends on the policy anniversary date before you turn a certain pre-defined age, for instance, 65, 70 or 80. Your premiums then change to stepped premiums, which means your premiums go up yearly as you get older. The stepped premiums increase annually because of the higher likelihood of death, illness or disability as you get older.
How much does level premium life insurance cost?
Level premiums will cost more, to begin with, but the premium you are charged will be based on your age when you took out that cover.
You can still have the cover adjusted to keep pace with inflation – the inflation indexation will add the cost of that new cover to the premium each time inflation is applied. Because level premiums don’t increase each year with your age, they can give you more certainty on cost when planning for the future.
Your level premium life insurance can change
While your level premiums don’t increase because of your age, your premiums can still change because of the following reasons:
Keeping Up With Inflation
With automatic indexation, the insurance company increases your cover amount every year on your policy anniversary to help your cover keep up with inflation. So as your cover amount rises, your premium will also increase.
Increases in premium due to a review of insurers underlying rates
Insurers regularly review their underlying premium rates for all policies and can make changes to these rates if needed.
For instance, insurers might need to increase the premiums if they pay more claims than expected or if the economic conditions change.
That said, most insurers guarantee not to increase level premium life insurance, but the underlying rates for trauma and income protection might increase.
Premium discounts may change
Multi-benefit discounts may reduce if you cancel parts of your cover, and your premiums might therefore increase.
Combining stepped and level premiums
Just as you can opt for a combination of fixed and variable rate home loans, you may want to take out part of your insurance using stepped premiums and use level premiums for the rest. This way, the premium in the earlier years will be lower than if you opt entirely for level premiums.
Over time, you can reduce your stepped premium cover as you build up more assets and potentially need less insurance. As a result, you could end up paying level premiums on most (if not all) of your insurance in the later years and benefit from the lower premium costs associated with level premiums at that time.
Factors to be aware of:
- The earlier you ‘lock in’ the level premium, the greater the potential long-term savings. Because level premiums are generally lower if you take out the insurance at a younger age, however, as you approach age 65, the difference between the two premium structures diminishes for new policies.
- Level premiums can simplify budgeting because you know exactly what your insurance will cost in advance.
- The maximum age you can start a policy with level premiums is generally lower than for stepped premiums.
How to buy level premium life insurance
If you want your insurance to be there when you need them, it is worth considering what happens to the cost of your cover over time.
Premiums for personal insurances such as Life, Trauma and Income Protection rise rapidly after the age of 40, and the number one complaint about people cancelling their policies is cost.
Therefore, it is essential to structure your protection correctly. With the right approach, you can establish a new cover or alter the existing cover to not increase over time for age-related reasons.
The financial modelling we conduct provides an essential insight into what types of insurance might be appropriate and in what amounts and how long you might need it for.
Willi Olsen
The Insurance Specialist, Securing People’s Incomes.
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