Which option is cheaper in the long run?

Level premiums are usually cheaper in the long run if you hold your policy for 10 or more years, while stepped premiums become more expensive as you age.

Stepped vs Level Premiums – Life Insurance Comparison

Q: What are stepped premiums?

Stepped premiums start lower but increase each year as you age. They are more affordable initially but can become expensive long-term.

Q: What are level premiums?

Level premiums start higher but remain mostly stable over time. They offer long-term cost certainty and are best for policies held 10+ years.

Q: Can I switch from stepped to level premiums?

Yes, many insurers allow switching, but it may be more costly if done later in life.

Stepped vs Level Premiums – Which Life Insurance Option is Best for You?

When buying life insurance in Australia, one of the most important decisions you’ll face is how your premiums are structured. Insurers generally offer two main options – stepped premiums or level premiums. Both have their pros and cons, and the right choice depends on your personal circumstances, age, and how long you plan to hold the policy.

This guide will explain the difference between stepped and level premiums, provide examples of how they work, and help you decide which option is best for you.

Quick Comparison: Stepped vs Level Premiums

How they work:

- Stepped Premiums: Start cheaper, increase each year as you get older.

- Level Premiums: Start higher but remain more stable over time.

Best for:

- Stepped Premiums: Short-term affordability.

- Level Premiums: Long-term cost certainty.

Who benefits:

- Stepped Premiums: Younger policyholders who may change cover often.

- Level Premiums: People planning to keep cover for 10+ years.

Risk:

- Stepped Premiums: Becomes expensive later in life.

- Level Premiums: Higher upfront cost may strain budget.

Flexibility:

- Stepped Premiums: Good if cover is temporary.

- Level Premiums: Good if keeping cover into later life.

What Are Stepped Premiums?

With stepped premiums, the cost of your life insurance is recalculated each year based on your age and risk. This means your premiums start lower but rise steadily as you get older.

Pros of stepped premiums:

More affordable in the short term.
Good if you only need cover for a limited period (e.g. until your mortgage is paid off).
Easier entry for young families or first-time policyholders.

Cons of stepped premiums:

Can become very expensive in later years.
Not ideal if you want long-term stability.

What Are Level Premiums?

With level premiums, the cost is based on your age when you first take out the policy. Premiums start higher but generally remain consistent over time, only increasing with inflation or if you change your cover.

Pros of level premiums:

Long-term cost stability.
More affordable in the long run if you hold your policy for 10+ years.
Protects against sharp price rises as you age.

Cons of level premiums:

Higher upfront cost, which may not suit younger policyholders on tighter budgets.
If you cancel early, you may pay more overall than with stepped premiums.

Example: Comparing Costs Over Time

Imagine you’re 30 years old and taking out a $500,000 life insurance policy:

Stepped premiums: May start at $30/month but rise to $200+/month by age 50.
Level premiums: May start at $70/month and remain relatively steady into your 50s.

This shows how stepped looks cheaper early on but becomes more expensive, while level requires more upfront commitment but saves money if held long-term.

Which Is Better: Stepped or Level Premiums?

There’s no one-size-fits-all answer. It depends on your financial situation and goals:

Choose stepped premiums if…
- You want the cheapest entry point.
- You only need cover for a shorter period (e.g. while kids are young or while repaying a mortgage).
Choose level premiums if…
- You plan to hold your life insurance for 10+ years.
- You want to manage future cost increases and lock in stability.

Many Australians actually combine both options – starting with stepped premiums for affordability, then switching to level premiums later when their income is higher.

FAQs About Stepped and Level Premiums

1. Are stepped premiums always more expensive in the long run?
Yes, usually. Stepped premiums start low but increase significantly as you age. If you keep cover long-term, they will almost always end up costing more than level premiums.

2. Can I switch from stepped to level premiums later?
Yes, many insurers allow this. However, switching later in life may be more expensive, so it’s worth reviewing early.

3. Do level premiums ever increase?
Level premiums don’t rise with your age, but they may increase slightly over time due to indexation (inflation) or insurer adjustments.

4. Which option do most Australians choose?
Younger Australians often start with stepped premiums for affordability. Those looking for long-term stability or taking out large policies often prefer level premiums.

Final Thoughts

Choosing between stepped and level premiums is about balancing short-term affordability with long-term certainty. If you’re unsure, it’s best to compare quotes for both options and consider how long you realistically expect to keep your cover.

At Covermate Life, we help you understand the differences and find the best option for your needs.