Stepped vs Level Premium Structure?

6 February 2013
Stepped premiums are the most widely used in the risk insurance industry, representing about 70% of all policies written. But what is the difference between stepped and level premiums?

stepped premium is so called because it is recalculated at each policy renewal and, as the name suggests, usually goes up, according to risk factors such as age.

However, in some situations, the premium will actually drop because of your age. Why? Because insurance facts support that your age is less of a risk than the previous year. For example, a young man who grows out of being wild and reckless and settles down to raising a family of his own.

level premium, on the other hand, is calculated on your age at the start of the policy and the premium remains consistently level as you get older.

You may pay more than stepped at the time you take the policy out but the premium does not increase. In saying that, it can, in fact, go up if you increase your cover or if the company decides to review the whole contract but this is rare.

The best way to explain the difference is to think of stepped as a variable mortgage and level as fixed. Just as in a home loan situation, which is better, and why, are questions an adviser or planner can best answer.

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