09/11/2022
Which Premium Structure should you use?
There are 3 main structures to choose from...
✅ Stepped
✅ Rate for Age
✅ Level
Stepped - the least common. Stepped premiums increase by a fixed percentage for a fixed number of years. A good option for premium certainty for a period of time to cover a particular risk such as when children are young or to cover debt.
Rate for Age - the most common. Premiums will increase every year as we age to account for our increased risk of claiming. This keeps premiums low initially but will steadily become more expensive as we get older. This is good for those risks that decrease over time, eg kids become less dependent/leave home, mortgage is paid off, etc. We offset the premium increases by reducing your cover as it is no longer required.
Level - premiums will not increase for age. They may increase for inflation or product price increases depending on the provider and whether or not the premium rate is guaranteed or not. Typically, life cover is always guaranteed. We pay more for level premiums initially but can then save significantly in the long run. This is good for long term risk such as mortgage debt where we will still be paying this down (at least part of) for many years.. 30+.
Which structure to use will depend on your personal situation: financial, family, risk appetite, etc. Often a mix of all 3 can be really effective when managing your personal risk and getting the best bang for your premium dollar.
