Life insurance doesn’t need to be complicated. It has a lot of moving parts, and plenty of features, but it’s not a difficult product to understand once you know how it works.

Case in point, let’s look at how the premiums work. The preconception is that life insurance gets more expensive the older you get. In a lot of cases, this is true, because as you age you’re more susceptible to injury or illness, and therefore riskier to insure.

But there’s a way you can navigate around this problem (somewhat). Let’s look at the different ways your premium can be charged.

Stepped premiums

Stepped premiums generally start out cheaper, and becomes more expensive as you age. It’s initial low cost is its main advantage, but they have a drawback too. Since the premiums increase with your age, it ends up costing quite a bit to insure yourself as you get older.

Pros Cons
Cheaper when you first get insured.

A suitable option for those who may not want life insurance long term.

You’ll pay more in premiums over the life of your policy.

Can become too expensive to maintain when you’re older, which is generally when you need it most.

Level premiums

Level premiums are more expensive when you first take out your policy. However, they do not increase as you age. It may increase as your lifestyle factors change, and certainly does in small increments in line with inflation (CPI). This makes them more expensive initially, but far cheaper in the long term. It does increase a little with inflation, and often reverts to a stepped premium structure once you reach a certain age (usually 65).

Your policy can’t be altered without resetting that premium though. That means, if you circumstances change, your premium will go up permanently.

Pros Cons
You’ll save money long term.

Ideal for anyone who wants long term reassurance.

You can roughly budget for premiums, because they remain more constant over the years.

More expensive to pay for initially

You’ll end up on a stepped premium eventually, which could one day start to erode the savings you made.

What about hybrid premiums?

Hybrid premiums are a combination of level and stepped. They start off more expensive than your typical stepped premium, but cheaper than your level ones. It then increases like a stepped premium for a set period of time, and will then lock into a rate once you reach a certain age.

These hybrid products aren’t always available with every insurer. However, they could be something to consider if you’re want a combination of the two premium types.

How do I choose between these options?

It often comes down to one question: how long will you hold the life insurance policy for? If you plan on having it for decades, the answer might be a level premium. A level life insurance premium will inevitably save money over the long term.

If you only want cover for a few years, or will be happy to renegotiate your policy down the line, stepped premiums can be a good short-term solution. We’re ready to help you make that decision, so head through to our life insurance comparison page to look at your options. Or, take a look the types of life insurance besides term life.

The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.