What is the difference between Stepped and Level policies?
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As we get older our chance of making an insurance claim and therefore our insurance premiums go up each year. Many of us therefore cancel our insurance policies in our 50s and 60s just when we are most likely to make a claim.
| Insurance companies have an answer to that: Pay more in the beginning and in return the premiums will NOT go up with age. This is called Level Premiums. Level premiums only change with the amount insured (or if the insurance company changes its prices overall but that can be up or down). Non-Level Premiums also needed a name and therefore are called Stepped Premiums. With Stepped Premiums you pay less now but they go up with your age. Level premiums work out much cheaper in the long run for those who are under 45, have stable earnings and expect to continue with their insurance in their late 50s and early 60s. At that age, stepped insurance becomes expense.
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The above chart shows a 37 year old man taking out a $950 per year level insurance premium.
As you can see he always pays $950 for the level premium whereas the stepped premium starts out lower but rises sharply later in life.
In this case the red level premium line goes up a tiny bit over the years to reflect the fact that the $75 per year policy fee increases with inflation.
Many people choose to have level policies and also to have the sum they are insured for adjusted each year with inflation. In that case the red line would go up a bit more to reflect that the amount insured has increased.
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