In New Zealand, when you start a life insurance plan you usually can choose from two premium types: “stepped” premiums or “level” premiums. The difference is simple. Stepped life insurance premiums are designed to increase with age – so as you get older the cost of your insurance will increase every year. On the other hand, a level premium does not increase with age – so you getting older makes no difference to the cost of the life insurance.
Which is better? The answer depends on how long you are likely to need your life insurance for. At first glance a level premium looks more expensive – and in the first years after setting up your policy, it will be higher (around twice to three times the cost of a stepped life insurance premium is a good rule of thumb). However, because a level premium doesn’t increase with age, it can become much cheaper over the long term (say over 10 years).
So while a stepped premium is cheaper in the short term, in the long term it can cost a lot more. And in the very long term (say when you are in your 60s or 70s), a stepped life insurance premium is likely to be totally unaffordable.
In New Zealand, people have financially dependent children and debt for much longer than in the past. For this reason a level premium can sometimes be the only affordable long term life insurance option.
So, if you’re deciding between a stepped and level premium the main point to consider is how long you might want to keep your life insurance. If you might need it for only the short term (say less than 5 years), it’s highly unlikely that a level premium will be cost effective. In this case, a stepped life insurance premium will probably be the best option.
However if you might have a long term need for your insurance – for example you have young children or a long mortgage term, then look into level cover. You can ask your life insurance broker to compare the costs of both options for you – and you’ll easily see which makes more sense for you.
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