"With a bit of guidance, there are ways to structure insurance premiums to be a lot more economical over the life of a policy than by just taking out a standard, off-the-shelf policy" said Rebecca Howarth, Financial Advisor and Director of PEB Financial Planning.
"For example, paying level rather than stepped premiums often saves a fair bit of money over the life of the policy, and can make a cover more affordable at the time when they need it most."
How does the strategy work?
When you take out insurance within or outside super, there are generally two ways you can pay your premiums. You can opt for a stepped premium that is calculated each year in line with your age.
Or you can choose a level premium that is calculated each year based on your age when the cover commenced. Level premiums are usually higher than stepped premiums at the start.
Level vs stepped insurance premiums
However, over time, as stepped premiums increase, level premiums could end up cheaper—often at the stage in life when you need the cover most.The premium savings in the later years could also make up for the additional payments in the earlier years, saving you money over the life of the policy.
Note: Choosing a level premium does not mean your premiums are guaranteed or will not change in the future. Level premium rates may increase due to rate increases, CPI increases and policy fee increases. However, unlike stepped premiums, level premiums (excluding CPI and the policy fee) don’t go up by age-related increases.
Tips and traps
- You may want to take out part of your insurance using stepped premiums and use level premiums for the rest. This way, the premium in the earlier years will be lower than if you opt entirely for level premiums. Over time, you could then reduce your stepped premium cover as you build up more assets and potentially need less insurance. As a result, you could end up paying level premiums on most (if not all) of your insurance in the later years, and benefit from the lower premium costs associated with level premiums at that time.
- The earlier you lock in the level premium, the greater the potential long-term savings. This is because level premiums are based on your age when the policy commences and are generally lower if you take out the cover at a younger age. However, as you approach age 65, the difference between the two premium structures diminishes for new policies.
- Level premiums could make budgeting easier, because you have a greater degree of certainty regarding what your insurance is going to cost when compared to stepped premiums.
- The maximum age you can start a policy with level premiums is generally lower than for stepped premiums.
For more information
To find out whether you could benefit from paying level premiums, you should seek advice from a Financial Planner / Financial Adviser. A financial Planner can also help you determine the types and amounts of insurance you require and can review your needs over time to help make sure you remain suitably covered.
Rebecca from PEB Financial Planning can be contacted on 1300 187 894 for more advice or to book a free consultation at your home or our office in Inglewood or Willetton.
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.
PEB Property Group is a complete financial planning advisory service for Perth families. Offices are located in Inglewood and Willetton, Perth, Western Australia and offer - Financial Planning · Finance Broking · Property Management · Real Estate Sales · Property Investment · Development.
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PEB Financial Planning is a trading name of PEB Group WA Pty Ltd ACN 142 958 254. Rebecca Howarth and Howarth (WA) Pty Ltd trade as PEB Financial Planning. Rebecca Howarth (ARN 244928) and Howarth (WA) Pty Ltd (ARN 433328) are Authorised Representatives of NEO Financial Solutions Pty Ltd. AFSL 385845 | ABN 64 141 607 098.