How it pays to plan ahead with your premiums

Who wouldn’t love a crystal ball to predict the future? Imagine knowing the numbers for the next million-dollar Lotto draw! While that’s wishful thinking, you can largely guarantee that the cost of living will increase over time – along with your insurance premiums.

As we explain, if you’re seeking certainty when it comes to your insurance costs, opting for fixed premiums could be well worth considering.

The difference between stepped and fixed premiums

When it comes to your premiums, you might be pleasantly surprised to learn you generally have two options when it comes to your payments – stepped or fixed premiums.

Stepped premiums

With a stepped premium, your insurance costs start out lower and increase over time as you age. This is generally the default option among many providers.

The classic example is health insurance. With stepped premiums, your insurance costs will be much higher when you’re aged 60 years old, because you’re much more likely to make a claim.

Fixed premiums

Also known as level premiums, this option allows you to fix the cost of your premiums over time. You will pay more while you’re younger (usually over the first 10 years of your policy), but you’ll have the confidence of knowing your annual insurance costs stay largely the same as you age.

It’s important to note that you need to maintain your policy over the long-term to get the best outcome using fixed premiums. You will benefit the most as your policy matures.

Pay more now, or later?

To see the potential different outcomes between stepped and fixed premiums, let’s imagine the case of Peter. At 45 years old, he’s a senior property exec and a non-smoker. In insurance terms, he’d be classified as an ‘office worker’.

Peter has $500,000 in life insurance cover. His premiums are currently $68.67 per month.

By switching to a fixed option, Peter would pay a higher monthly premium initially – but realise significant savings over the long-term:

• For cover until he’s 70 years old, Peter’s fixed monthly premium becomes $234.10 – a saving of $33,880.08 over that time.

• For cover until he’s 80 years old, that monthly premium increases a little to $257.89 – but the overall savings become $252,115.32.

• For cover until he’s 100, Peter’s monthly premium becomes $870.38 – saving a mighty $2,959,790.04.

If he’s lucky enough to reach the grand old age of 100, you can almost guarantee Peter will have some big health needs.

How much cover might you need – and when?

As a general guide, deciding between stepped or fixed premiums usually depends on whether you think the level of cover you need may change – and when that could be.

• Think you need higher cover in the short-term, but not as much later on? Stepped premiums may be the more cost-effective choice.

• Decide that the amount of cover you need will probably increase over time? Fixed premiums could be the more affordable option by allowing you to ‘lock’ in your payments now.

A good way to think about it is to imagine yourself at retirement age. Would you benefit from having more certainty over the cost of your insurance, and are you likely to need your policy the most? Most of us would say yes!

A combination could be right for you

It’s not a case of one option over the other. You can get the best of both worlds.

If you had $1.2 million in life insurance cover, you might choose to:

• Put $500K on a fixed premium – and achieve those long-term savings.

• Have the remaining $700K of your cover as a stepped premium – opting to reduce that portion of cover over time.

This allows you to take advantage of the likelihood that you’ll be more financially secure in your older years.

The right advice to make the right decision

As you can see, there are plenty of choices! Speaking to an insurance expert gives you the information needed to make the best decision – now and in the years to come. For honest, impartial and independent advice, the team at Plus4 Insurance Solutions are here to help. Simply contact us now.

While all scenarios are fictional, each is based on actual insurance premium data as of November 2022.