Know the difference between stepped and level premiums
Life insurance premiums are predominantly based on the risk of certain events happening to you. Because health risks increase with age, life insurance premiums will generally increase over time.
That’s why most insurers offer two common ways of paying for, and managing, the costs of your cover over time:
- Stepped premiums: when the cost of your cover is recalculated each year based on your age at your policy anniversary. Generally this means your premium will increase each year as you get older.
- Level premiums: where premiums are calculated based on your age when any cover started. Your premium is generally averaged out over a number of years, which means you avoid increases in your premium due to age at each policy anniversary. This means your cover is more expensive than ‘stepped premiums’ at the beginning of your policy, but generally gets cheaper (relative to stepped premiums) as your policy continues.
Regardless of whether your policy is on stepped or level premium,premium rates and premium factors are not guaranteed or fixed and many life insurers in Australia have repriced premium rates in the past.
Stepped or level premiums – which is right for you?
Generally, this depends on how long you’re planning on keeping your insurance. If you’re planning on keeping your policy for longer than 10-12 years, level premiums may save you money over the life of your policy.
You may also be able to use a combination of stepped and level premiums.
For example, if you think you might want to reduce your level of cover down the track (e.g. when you're kids are grown up or you've paid down debt),you may be able to use level premiums for the portion of cover you think you'll keep longer and stepped premiums for the additional cover.
This is something your financial adviser can help you with.
Repricing is a possibility regardless of which structure you choose
It’s important to note that at policy anniversary the premium may still increase (even with level premiums), because age is just one factor that determines your premium. Other factors that impact premium (such as claims trends in Australian population) can result in a repricing of your insurance cover.
When insurers reprice stepped or level premiums, they don’t do it for an individual policy within a specific group unless they do it for every policy in that group.
To decide whether you’re better off on stepped or level premiums going forward, we recommend you speak to your financial adviser. They can help you understand your policy as well as any repricing activity that’s recently occurred, so you can make an informed decision.
A graphical example
Below is an illustration of stepped v level premiums, showing the difference between the two when you look at increases due to age. Other types of premium increases aren’t shown on this graph.
For illustrative purposes only. This graph illustrates age-based premium increases for stepped against level for all covers. This premium comparison has been calculated, assuming all other factors affecting the premiums are excluded.
Both stepped and level premiums can increase due to factors other than age.
Premium rates and premium factors are not guaranteed or fixed, and insurers have increased premium rates in the past and may increase in the future.
We recommend that you refer to the relevant product disclosure statement and policy documentation, and speak to your financial adviser, to understand other factors affecting your premiums.
Click here to see why 3 in 4 policies are bought on a stepped premium.
Unlike your car insurance, the policies we offer at OnePath Life are what is known as 'guaranteed renewable' policies – meaning that each year your policy is renewed, we must continue to cover you under the same terms and conditions. So regardless of whether your health has declined or you've taken up new activities, we cannot change what you're covered for.
No matter how your personal risks change after taking out your policy, your cover cannot be revoked – irrespective of changes to your risk.
For example, if you’re diagnosed with diabetes or even choose to start base jumping two days after you take out your policy, you’re guaranteed to have the same cover, for the same price. In fact, you don’t even have to tell us about these changes.
An added benefit of this is that when we make improvements to policy terms that benefit you, we will automatically include them in your existing policy – at no extra cost.
If your occupation becomes riskier, you don’t have to tell us. But if you do, we won’t increase premiums, insure you for less, or change your benefits*. However, if your occupation becomes less risky, make sure you tell us as your premiums could be reduced.
The movement here is completely in your favour.
Look into future insurability, where you can increase your cover without any medicals:
- once every 12 months if one of many designated trigger events occurs (e.g. you get married); or
- every 3 years if no other future insurability increases have occurred.
The bottom line is, once we take you on, we take on the risk. So no matter how your behaviours change, you’re guaranteed the terms of your policy from the day you took it out. And, in some instances, you can improve your benefits, or reduce your premium, without additional risks or costs.
*For Business TPD policy, a change of occupation can alter terms of cover. Should you change occupation, you will need to notify OnePath Life. Please refer to the OnePath Product Disclosure Statement and Policy Terms for details.
OneCare is issued by OnePath Life Limited (OnePath Life) ABN 33 009657 176, AFSL 238341. OneCare Super is issued by OnePath Custodians Pty Limited (OnePath Custodians) ABN 12 008 508 496, AFSL 238346. OnePath Life is not a related body corporate of OnePath Custodians. We recommend that you read the OneCare Product Disclosure Statement and Policy Terms available at www.onepath.com.au or by calling 133 667 before deciding whether to acquire, or to continue to hold the product.
To decide whether you’re better off on stepped or level premiums going forward, we recommend you speak to your financial adviser.