Why Level Insurance Premiums are so important
by James GerrardSat Feb 21 2015
When considering taking out a life insurance policy or when considering life insurance policy options presented to you by your Financial Planner, selecting a level insurance premium is of the utmost importance.
Level Insurance premiums are a means of paying for your insurance policy that has its cost calculated at the policies date of inception. For life insurance this means the premium is fixed with respect to the risk associated with your age when you adopt the policy. Of course this price is adjusted to a higher level in order to compensate the insurance company offering you a fixed price. This results in high costs in the short term but is counterbalanced by long-run savings as you continue to age whilst continuing to pay the same amount for life insurance.
It is for this reasons that financial advisors overwhelmingly recommend Level Insurance Premiums as price does not increase in accordance with the risk associated with your age as it would for a stepped insurance premium.
Consider the following table that details a hypothetical comparison between a stepped and level insurance premium for a non-smoking female at the age of 30 from Sydney taking out life insurance. Please note these figures are only reflective of the relationship between levels and stepped insurance premiums and are not accurate estimates of the actual cost of life insurance
| Year | Level Insurance Premium Annual Cost | Stepped Insurance Premium Annual Cost |
|---|---|---|
| 1 | $1102.00 | $808.00 |
| 5 | $1102.00 | $953.00 |
| 10 | $1102.00 | $1109.00 |
| 15 | $1102.00 | $1447.00 |
| 20 | $1102.00 | $1779.00 |
| 25 | $1102.00 | $2202.00 |
| 30 | $1102.00 | $2703.00 |
| Total=$33060 | Total=$47147 |
As can be seen from this table over a 30 year period there is a total saving of $14087 or 30%. At approximately the 10 year mark there are year over year savings for level insurance premiums over Stepped insurance premiums.
Clearly level insurance premiums are of great importance when considering taking out a life insurance policy as they provide a substantial cost advantage over the long term.