Life Insurance: Stepped or Level which is better?

What would become of your family's financial position if you had died yesterday? Will they be able to meet important financial commitments like mortgage repayments, child care, education or even the most basic of necessities such as food? Would your family be able to maintain their quality of life or would it suffer a serious downturn?

This is where life insurance can assist, by providing a lump sum in the event of your death, which your dependants can use to help meet immediate or ongoing financial commitments. As with all forms of insurance, life insurance is there for your peace of mind. So when it comes to paying for this peace of mind, a little forward planning and research may save you a significant amount in premiums in the longer term.

Premium options.

You can structure your premiums in one of two ways when taking out life insurance: stepped or level premiums.

For stepped premiums as you age the premium rate increases, or 'steps-up', in line with risk.

For level premiums the cost generally remains the same throughout the duration of your policy. Unlike stepped policys they have a specific end date which is defined at the commencement of the policy. Level premiums are therefore not only determined by the amount of cover you require and your entry age, but also the duration of your policy. Your premiums are effectively averaged out over the life of the policy.

Stepped or level premiums?

The answer to this question depends on your personal circumstances. At first glance, stepped premiums may seem appealing, as they are the cheapest option at entry stage, in contrast to level premiums, which are likely to have much higher payments early on.

Yet as time goes by, stepped premiums will eventually overtake level premiums and can become more unaffordable around the same time your chances of claiming become more likely (typically between the ages of 40-55 according to claims history). On the other hand, level premiums tend to be cheaper in later years, making your premiums more affordable at the time that the chance of making a claim increases.

If you have short term cover needs go with stepped premiums. If however, your needs are long term, you will probably be better off with level premiums. If you are in doubt, ask your adviser for a stepped verses level premium comparison where you will be able to identify the break even point and also the cost savings in the longer term.

The best of both worlds!

An increasingly popular option - much like a mortgage combining fixed and variable elements - is to split your cover into two policies, one with stepped and one with level premiums. By doing this, you can take advantage of both the initial stepped discounts and the long term level savings. When you are older with less financial commitments, you could scale back your cover by cancelling the stepped policy, while maintaining the level policy which has cheaper premiums.

Regardless of your choice between stepped or level premiums, having the right amount of protection to cover any financial obligations in the event of your death is important.

While nobody thinks it will happen to them you should "Plan for the worst and hope for the best". Organise your insurance today.

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