Insurance can be difficult to understand without the help of an insurance broker, what with the wide range of products, and the differences between them. However, it’s important to be aware of the basics in order to feel in control of your insurance premiums.
There are two ways you can set-up your premiums; one is best for long term cover that you plan to have for 10 to 20 years or more, and the other is best to cover events for the short term – closer to 5 to 10 years. Let’s have a look at level and stepped premiums in more detail below.
Stepped premium is a premium structure which allows for the covered benefit to increase with inflation, which is called CPI. For example, in year one you may have $100,000 life cover sum insured, and in year two this may increase to $100,832, year three may increase to $101,612, and so on. This means that the premiums will increase accordingly year by year.
The benefit of this is that in 5 to 10 years’ time, the benefit amount has increased alongside the value of money. It also makes the cover cheaper at first, but as the benefit value goes up each year, so do the insurance premiums. This type of cover is great for mortgage repayment insurance. As years go on, and the premium goes up, but your actual mortgage goes down and you can adjust your level of cover to suit your debt.
Level premium is a premium structure which allows for the covered benefit to staying the same each year. If you would like to have $100,000 as the benefit amount, it will stay at this value until you increase, decrease, claim or cancel. This keeps your premium from increasing with inflation, so you achieve long term savings if the policy is in place for 10+ years. Essentially, the premiums are more expensive at first, but more cost-effective the longer you keep the policy.
Common features between both structures
In both of these structures, premiums are increased by at least two other factors:
- Age – as we all age the chances of making a claim increase. Some insurers decide to slowly increase the premiums each year due to the assured’s age. Other insurers have ‘age brackets’ within which there may be little or no increase for a 5 to 10-year window, and then a large increase in the next bracket.
- Increase in Medical Costs – As science and medical treatments evolve, this can also mean diagnosis and treatment costs increase. This includes when a new cancer treatment drug is released, and when a new diagnosis machine is invented and in use.
There may be other factors which come into play to. It’s best to talk directly to your insurance broker in order to find out how your policy is calculated.
The most important thing to ask yourself
“Of the insurance benefits I would like to have, such as Life Cover, Trauma Cover, Mortgage Protection, Medical Cover and more, which benefits would I like to have for over 10 years, and which would I like to have for less than 10 years?” Typically, you will want Life Cover as a Level Premium, and other benefits as stepped, due to wanting to have Life Cover in place for the longest period of time. Anything is possible – you just need to ask, and we can discuss what may be best for your situation! We think outside of the box and can tailor a plan that will suit your needs, budget and long terms goals. Don’t wait – contact Rethink Group today!