In addition to considering recommendations around appropriate levels of cover, ownership structures and insurance providers, it is also very important that you consider recommendations around whether stepped or level premiums are appropriate. This area is often overlooked and it could have serious long term affordability consequences.

Stepped Premiums

As the name suggests, it is defined by premiums that go up the older you get, and the longer the policy is held. Stepped premiums are lowest at the start of the policy and biggest at the end.

Unlike most other developed economies, stepped premium insurance continues to dominate the Australian life insurance market. Over 91% of current policies in Australia are priced through a stepped premium structure.
The net effect is that while stepped premiums are likely to be lower the younger you are, they tend to increase significantly over time. In worst case scenarios, consumers in later years – especially those who have reduced or fixed incomes – find that higher premiums become least affordable at the very time they’re needed most.

Our figures show that quite a few people take out life insurance cover in their mid-30s, only to let it lapse in their mid-40s – just before the average age when claims are typically made.

Affordability in conjunction with a lack of understanding around the vital support role life insurance plays in a time of need are thought to be reasons behind this trend.

It is important that policies don’t lapse for the wrong reasons. At Elston we consider the type of insurance cover being recommended and the likely period of time this cover will be required when making recommendations on whether stepped premiums are appropriate.

Level Premiums

Level premiums remain at the same level for the life of the policy but, depending on the policy type, might increase for inflation if you’ve elected to “index” incremental increases to your benefit.

This means the premium amount will be the same at the start and at the end of the policy (subject to inflation/indexation increases).

A key benefit of level premiums, apart from generally being more price effective after about 15 years, is that they provide price certainty and help manage the affordability issues that can be experienced with stepped premiums.

Certain types of insurance covers are more likely to be required longer term and there is often significant benefit in considering level premiums for these insurance covers. Added to this is the reality that as we get older we are more susceptible to claiming on certain types of insurance. This emphasizes the importance of ensuring that cover remains affordable at the very stage in life when we are most vulnerable.

Pros and cons

Both stepped and level premiums have their pros and cons and it is important that you receive quality advice around the implications of each and whether either is appropriate to your situation. Good advice in this area should ensure that the only reason you would cancel your insurance is because you don’t need it anymore as opposed to cancelling valuable insurance cover because you can’t afford to keep it.

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an insurance adviser will be in touch.