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Stepped vs. Level Premiums

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When you purchase life insurance, you will need to make decisions on how you want the policy to be structured. One of the key choices to make is whether you should pay stepped or level premiums. There are important differences between these two options and you want to ensure you make a choice that makes the most financial sense for you.

What are stepped premiums?

Stepped life insurance premiums mean that your premiums will be calculated based on your age and will typically rise over time as you get older. When you purchase a policy with stepped premiums, the amount you pay is recalculated each year at the anniversary of the policy. In most cases, premiums go up each year; however, there are some exceptions if the insurer determines your circumstances have become less hazardous. For example, if you have given up a dangerous job and settled down into a stable career and family life, the insurer may reduce your premiums to account for the reduced risk.

What are level premiums?

Level premiums mean that your premiums are not calculated based on your age, but instead are the same for the duration of the time you have the policy. You can typically keep your premiums set at the same level without an increase in cost from the time you buy the policy until you reach age 65. If you wish to keep coverage at age 65, your policy will generally revert to a stepped premium policy.

What are the advantages of stepped premiums?

Stepped premiums can make your policy more affordable when you first purchase it. Since income tends to rise as you get older, you may be better able to afford higher costs as your policy premium goes up as you age.

For many young people, stepped premiums mean that a policy is within reach, whereas level premiums would put too big of a strain on the budget. Another advantage of stepped premiums is you pay only for the level of risk that is actually associated with your current life stage.

What are the disadvantages of stepped premiums?

The big disadvantage of stepped premiums is uncertainty of cost. Your premiums are going to go up significantly as you get older and could become unaffordable, forcing you to drop coverage when you still need it.

What are the advantages of level premiums?

Level premiums provide you with security and consistency. You know exactly what your life insurance is going to cost for the duration of the time when you have the policy. While you pay more in the beginning, the premium costs end up averaging out over time. If you keep the policy for decades, you can actually end up spending less overall in total premiums than you would with a stepped premium policy.

What are the disadvantages of level premiums?

The big disadvantage of level premiums is that you have higher up-front costs when the policy is first purchased. This can make life insurance more difficult for you to afford when you are younger and not making a very high income. Buying a policy when you are young is important to protect your dependents and you should not forgo a policy just because you are unable to afford coverage with level premiums.

Should I choose stepped or level premiums?

Whether to choose stepped or level premiums is going to depend upon your short and long-term financial goals, your available funds, and your risk tolerance. If you are struggling to pay the bills and could not afford a policy with level premiums, opting for a policy with stepped premiums is better than not having any kind of coverage at all. However, if you can afford to pay extra for level premiums and want to save money in the longterm while keeping a policy for decades, then a level premium policy makes sense.

How should you decide what type of life insurance to buy?

When you begin to shop for life insurance, you should compare policies to find out what the differences in cost are between stepped and level premium policies. You can then make a more informed choice about whether you can afford the higher up-front costs of a level premium policy.

If you can afford the higher costs in your budget and wish to keep the policy for a long time, buying a level premium policy can be your best bet. If you want insurance coverage for the short-term and not for decades, or if you want to keep your out-of-pocket costs low, then choose a stepped policy. By comparing what is available, you will be able to determine what makes the most financial sense for you.

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