LEVEL OR STEPPED LIFE INSURANCE?

What's the difference and what's the best for you.

When it comes to life insurance, there are 2 main options for the consumer: Level or Stepped. Both offer distinct advantages depending on need. For you, the client, understanding the nuances is essential to making an informed decision.

You need life insurance, that’s why you’re reading this. So is it Level or Stepped Life Insurance? Perhaps a combination of both will give you the perfect balance. Read on and find out more.

Level Life Insurance: Predictable Premiums

Level Life Insurance offers you fixed premiums which provides predictable payments for the chosen duration of the policy. You are no doubt aware that financial uncertainties can cause problems with long-term planning and level Life Insurance helps with that.

As Level Life Insurance premiums remain constant over time you can budget effectively without fretting over the inevitable age-related increases in cost.  Much like a fixed term mortgage only premiums can be fixed for a lifetime.

As Level Life Insurance lends itself to long-term financial strategizing it is ideal for retirement planning and legacy preservation. It's a great way to have affordable life insurance past retirement age. Not only that, it can save tens of thousands of dollars over the lifetime of a policy.

The reality is that death is expensive. There is the cost of a funeral, legal fees, family travel, repatriating remains, etc. In retirement this can take from the pension pot and can’t readily be replaced. You don't want to leave your partner short of money? Do you?

There is a downside if you cancel a level life policy. As premiums are calculated over a lifetime of risk it is initially more expensive. Cancelling early means that you will probably have overpaid. Additionally if you cancel a level life policy you will never be able to replace it for the same premium. It will almost always be more expensive.

Stepped Life Insurance: Scaling Heights with Flexibility

Stepped Life Insurance is more flexible. Premiums are initially cheaper but will increase annually as you age. There may be other reasons why a premium could change including periodic adjustments to maintain profitability and claims balance with the insurer.

The primary attraction of Stepped Life Insurance is the initial affordability. With lower premiums the policy structure appeals to individuals and families seeking protection with a small budget. Stepped Life Insurance can allow short-term affordable coverage.

Another advantage of Stepped Life Insurance is that it can be aligning to life's changing short-term needs. As you progress through various stages of life, marriage, parenthood, career advancement and retirement, your insurance needs can be tailored accordingly. Stepped policies accommodate these transitions, allowing policyholders to adjust coverage levels and premiums to suit.

On the downside the premiums can become unaffordable as you age. You may find you have to cancel a policy due to the rising premiums.

Choosing Wisely: Navigating the Crossroads

Your choice between Level or Stepped Life Insurance is not a black or white, you can mix and match.

Example 1:

John and Jess are 35 and want life insurance. They want enough to cover all funeral, legal and any other costs whenever they die. Even if they are retired. Having just bought a house with a $500,000 mortgage they also want the loan covered until paid-off. Their children are 10 and 12 and they want to be able to cover education costs if they die prematurely.

John and Jess consult with an insurance adviser and decide to take out $100,000 level life to age 100. They like knowing the premium won't change and at death there will be money available. To cover the mortgage and child expenses they opt for a stepped policy of $700,000. This will offer a lower premium but they plan to reduce the insurance before it becomes unaffordable as the mortgage decreases and the children become independent.

Example 2:

Alan and Andrea are both 55 years old and they have $500,000 each of stepped life insurance that they took out 25 years ago. The premium is getting higher than they would like and are considering cancelling it. They feel it's not needed anymore, the kids have left home and they are downsizing to lose the mortgage. It would be nice to have some insurance into retirement but how will it be sustainable?

They seek and speak to an insurance adviser and together they reach a solution. After discussion they each convert $100,000 of their cover to level insurance to age 80. Now they have cover with a predictable premium going into retirement and can budget accordingly. They know after age 80 it may be unaffordable but that is a risk they are willing to take.

WHEN IS THE BEST TIME TO LEVEL YOUR LIFE POLICY?

Death always comes with a price tag. As an experienced insurance adviser I hear every day that someone would happily be thrown over the back fence. Unfortunately that’s illegal, besides the neighbours would complain about the smell. We also have to remember that funerals are for the ones we leave behind. It’s not just the funeral that costs, there could be legal fees, outstanding bills, taxes, family travel, repatriation of remains, a big party … it all adds up. While we don’t like to admit it, death is inevitable and it is our responsibility to make sure that we don't leave a bill. So when is the best time to take out a level life policy? Before your last birthday was when it was the cheapest, after your next birthday it will be more expensive, so right now is the sensible answer.

Cover Yours Ltd (FSP769531) and Marc Hamilton (FSP306046) are registered Financial Service Providers and you can search the register here. Marc Hamilton is a member of the FSCL Disputes Resolution Service. Cover Yours Ltd and Marc Hamilton’s disclosures can be found here or by emailing marc@coveryours.co.nz