Published 22 Dec 2016
If you're seeking insurance for income protection, trauma cover, life cover or total and permanent disability, you may be given the opportunity to choose between steeped or level premiums.
Find out what the key differences between the two are and who tends to go for what premium.
Stepped premium is the most common policy, according to an Australian Securities and Investment Commission (ASIC) report.
With a stepped premium, your insurance costs will increase or "step up" each year. The increase in costs is based on the logic that you're more likely to make a claim when you're older. The stepped premium also takes other risk factors besides age into account to determine the price.
The ASIC states that a benefit of stepped premiums is that your insurance costs are normally cheaper in the beginning. For this reason, Compare the Market advises people who will not have an insurance policy for a long time to get stepped premiums. This is because customers won't have to endure the climbing costs in the future since it's only for short-term coverage.
The Australian Securities and Investments Commission (ASIC) explains that a level premium means that your insurance premium will not change - it remains "level" throughout your life. However, this implies that it will be more expensive when you first get life insurance than it would be with stepped.
It is also worth noting that your premium may get more expensive over time due to fluctuation in your insurance provider's fees or inflation. So, it is not guaranteed that it will remain level, though the insurance fees will not increase as dramatically as they would with a stepped premium.
An ASIC report says that level premium policies are better suited for customers who enrol at younger age and are likely to hold onto their policy for a long time. Over time, the initial high costs of level premiums are negligible in comparison to a stepped premium. In other words, the costs all even out in the long run.
The level premiums are thus ideal for individuals who plan on keeping with the same insurance policy over a long period of time.
However, ASIC admonishes customers that one premium structure may be better for you but not for others with similar problems. At Gerard Malouf and Partners, you can consult a compensation lawyer to discover what premium you should choose based on your current situation.