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Life insurance policies generally provide two alternative premium structures - stepped or level. At the time of arranging a policy, individuals are normally able to select either stepped or level premiums, with the selection then applying for the life of the policy.

Stepped premiums

Stepped premiums will increase each year when the policy is renewed, in line with the age of the insured individual, until the benefit expiry date or the policy is cancelled. Life insurance premiums are calculated based on mortality risk, that is, the likely risk of death for a person at a particular age. Annual price increases with stepped premiums reflect the increased mortality risk as the insured ages - premiums increase in 'steps' over the term of the policy.

Level premiums

Level premiums are set at the commencement of life insurance policy, and then remain constant or 'level' for the life of the policy. While this does mean that the initial premium will be higher ensures that premiums do not increase with increases in age and mortality risk. (Please note that even level premiums may increase at the Consumer Price Index (CPI) rate of inflation.)

There may be limitations on the availability of level premiums - for example, some insurance companies only offer level premiums up to age 65, with premiums reverting to stepped after this age.

The above graph illustrates the difference in the cost of stepped and level premiums over time. Though lower than level premiums when a policy is initially purchased, stepped premiums will continue to increase as the policyholder gets older.

It should be noted that some insurance companies may not offer both stepped and level premiums on all policies. For full details and any applicable terms and conditions, please refer to the product disclosure statement.