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Income Protection Comparisons

Level Premiums


Generally, level premiums in a policy give you peace of mind that your premiums will remain consistent up until you reach the age of 65 next birthday. With most level premium policies, at the age of 65 next birthday, your level premium structure will revert to a stepped premium structure.   

While most income protection companies will revert your level premium policy to stepped at the age of 65 next birthday, there are some select insurers that provide level premiums up until the age of 70 next birthday, at which point they are reverted to stepped premiums.

Please note that most income protection policies expire at age 65 or 70.

How are Level Premiums determined?

Level premiums are based on your age next birthday at the date of your policy commencement, that is, they are based upon the risk that your age carries. An easy way to view level premiums is through the following equation:     

Level Premiums = Sum Insured X Entry Age Risk Factor


Level Premiums compared to Stepped Premiums

Level premiums are best for those who are looking for long term protection and a consistent premium.
As shown in the below graph, level premiums will generally be more expensive than stepped premiums in the shorter-term. However in the longer term they will end up being less expensive than stepped premiums.
Generally the point at which level premiums start becoming less expensive than stepped premiums generally occurs between the 7th to 10th years of cover.

Stepped Vs Level Premiums


Benefits Comparison – Level Vs Stepped Premiums

In comparison to stepped premiums, level premiums offer the following advantages and disadvantages:

Advantages:

Premiums cost less in the long-term – level premiums will generally be less expensive than stepped premiums.

Financial foresight – as your level premium costs will remain consistent, you will know in advance what they are, allowing you to plan ahead with respect to how you will pay for your cover.

Disadvantages:

More expensive in the short-term – when compared to stepped premiums, level premiums will generally be more expensive in the short-term.

Example – Level Premiums Vs Stepped Premiums

Sarah, who is 31 years old and earns $60,000 per year, is considering taking out an income protection insurance policy to cover him up until the age of 65.

She is a non smoker and works in a white collar occupation. She is applying for a policy with a waiting period of 30 days.

Sarah is trying to weigh up whether she should pay level or stepped premiums given his situation.

If Sarah were to choose a level premium policy, she would be required to pay $68 in monthly income protection premiums. This same rate would be consistent up until he reaches the age of 65.

If Sarah were to choose a stepped premium policy, her monthly premium rate would change with her age according to the following:

 

Age Next Birthday Monthly Premium Rate
32 $53
35 $57
38 $65
41 $76
44 $92
47 114


Given that Sarah is looking for long term income protection covering a duration of up to 35 years, it would be more affordable for her to take out a level premium policy.

Who are best suited to Level Premiums?

Level premiums are best for those who:

  • Require cover for the long-term. In income protection terms, the long-term is generally considered as 7 years or more.

  • Have or expect to have financial obligations that will need to be paid of in the future.

  • Currently have the financial means to afford a higher short term premium rate (when compared to stepped premiums). 

Other Factors to Consider

Level premiums can also be subject to inflation, where a CPI (Consumer Price Index) condition is applied to ensure your premiums reflect any inflationary changes.

Please note that at the time of writing there is no income protection company that offers a guarantee that their level premium will never increase. Most income protection companies include a clause in their Product Disclosure Statement (PDS) covering this point.

If you would like to compare level premiums quotes, please call 1300 135 205 to speak with one of our friendly advisors.