How Level Premium
life insurance work
Level premium life insurance don’t go up because of your age. If you want your protection to be there when you need it the most, level premium life insurance gives you certainty on cost. And you can save money in the long-term.
- Guaranteed premiums don’t increase because of age.
- Level premiums life insurance policies typically last 10-30 years
- Your beneficiaries receive a tax-free lump sum death benefit if you die during your policy term
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. You trade-off 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 every year as you get older. The stepped premiums increase each year 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.
Stepped vs level premiums cost difference
Here’s a side by side example of a hypothetical stepped v level annual premium over 10 years. As you can see, stepped premiums generally start out cheaper but in the long run, it’s likely to cost you more.
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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 they 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 the 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 fixed 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.
Level Premium life insurance FAQ's
What is stepped and level premium?
There are two ways you can pay your premiums in New Zealand.
- Stepped Premium – your premium increases every year with your age.
- Level Premium – your premium generally does not change and is based on your age when the policy commences.
Does level premium life insurance increase?
Level premium life insurance does not increase with age. However, level premiums are more expensive when you first take out your policy.
Premiums increase in small increments in line with inflation (CPI). This makes them more expensive initially, but far cheaper in the long term
How does age affect life insurance?
Your age is one of the primary factors influencing your life insurance premium rates.
Typically, the premium amount increases on average by 8% to 12% every year.
The reason premiums increase every year is simple math.
As we get closer to our life expectancy, we get more expensive to insure.
To be able to hold level premiums life insurance prices steady, rather than raising premiums every birthday, insurers spread the premiums you would pay over 10, 20 or 30 years and average them into one payment fixed premiums.
Instead of paying low premiums when you’re young and very high premiums when you’re older, you pay the same amount every year.
Can I add critical illness cover to level premium life insurance?
Critical illness cover can help pay for your mortgage and other outgoings if you’re diagnosed with a critical medical condition, like cancer, heart attack or stroke.
Adding critical illness cover to your level premium life insurance policy means you’ll have more cover – so your monthly life insurance payments will be more expensive.
Does level premium life insurance increase?
Level premium life insurance can increase.
- When your cover increases due to indexation.
Where your policy has CPI indexation, you will be offered an automatic increase to your cover each year and will have to pay for the extra cover. Some policies use the level premium from the start of the policy for these indexation increases (these are called “True Level” policies). Other policies charge the level premium applicable to your age at the time the cover is increased, which will be higher each year as you age.
- If you ask for an increase in your cover.
In this case, the extra coverage is always priced at the level premium applicable to your age at the increase.
- Should the insurer decide to increase their rates.
Level premiums are not guaranteed and, therefore can be increased if the insurer decides to increase their premiums, e.g. in response to rising claims.
- If the government imposes a tax or increases its charges.
If stamp duty or other taxes applicable to the policy are increased by the government, these will be passed on to you.
- At the end of the Level period. A premium will usually only be level for a fixed period, such as to age 65 or age 70. At the end of this period, the level premium will revert to the applicable stepped premium for your age. This can result in a considerable jump in premium.