Stepped vs level premiums for life insurance: which costs less?

A stepped premium is recalculated at every renewal using your age at the time, so it starts low and rises each year. A level premium is calculated using your age when the cover starts, so it starts higher but does not rise because you get older. Level premiums usually cost less overall if you keep the cover for more than about ten years; stepped premiums cost less if you expect to reduce or cancel cover sooner. Neither is fixed: both rise when the sum insured is indexed and when the insurer changes its rates.

This guide is part of the costs and rules overview. All premiums below are illustrative.

How each structure works

Feature	Stepped	Level
Based on	Your current age at each renewal	Your age when cover started
Starting cost	Lower	Higher, and the gap is widest for younger buyers
Rises with age	Yes, every year	No
Rises with indexation	Yes	Yes, the indexed part is often priced at your current age
Rises with insurer rate changes	Yes	Yes
Available in super	Almost always the structure used	Rarely
Typical end of level period	—	Many policies switch to stepped at a set age such as 65
Cost of cancelling early	Nothing extra	You lose the benefit of the higher early premiums

Cover through a super fund is almost always priced on an age-based scale that works like a stepped premium, with the cost rising as you move into each age band. Level premiums are a retail feature.

A 30-year illustrative comparison

Take $750,000 of life and TPD cover for a non-smoker starting at age 35. Suppose the stepped premium starts at $800 a year and rises about 8% a year with age, while the level premium is $1,250 a year. To keep the comparison simple, both ignore indexation and rate changes.

Age	Stepped premium that year	Cumulative stepped	Cumulative level
35	$800	$800	$1,250
40	$1,175	$5,869	$7,500
41	$1,269	$7,138	$8,750
45	$1,727	$13,316	$13,750
50	$2,538	$24,259	$20,000
55	$3,729	$40,338	$26,250
59	$5,073	$58,485	$31,250
64	$7,454	$90,627	$37,500

Reading the table:

The yearly stepped premium overtakes the level premium at age 41, after six years.
The cumulative cost evens out at about age 45 or 46, after roughly 11 years. Before then, stepped is cheaper in total. After it, level is cheaper.
Over 20 years (to age 54) stepped costs about $36,600 against $25,000 for level, a difference of about $11,600.
If you hold cover to 64, stepped costs about $90,600 and level $37,500.

The arithmetic for the first stepped premiums: $800 × 1.08 = $864 at 36, × 1.08 = $933 at 37, and so on. The real rate of increase varies with age and insurer, and is usually steeper after 50.

When stepped makes sense

You expect to reduce cover as the mortgage falls and children leave home, perhaps within 10 years.
Cash flow is tight now, and having the cover matters more than its long-run cost.
You are older at the start, so the gap between stepped and level is smaller and the level period is shorter.
The cover is temporary, for example to cover a business loan for five years.

When level makes sense

You are young and expect to keep a similar amount of cover for 15 years or more.
You are buying trauma or income protection to age 65, where stepped premiums in your 50s can become hard to afford, which is when people cancel cover they still need.
You want more predictable premiums, accepting that they can still change with indexation and rate reviews.

The catches with level premiums

Not guaranteed. Insurers can raise level premium rates for a whole class of policies. Level means not rising with age, not frozen.
Indexation. Each year's CPI increase in cover may be priced at your current age, so part of a level policy behaves like stepped cover.
Switching costs. If you replace a level policy after 10 years, the new policy is priced at your new age. You lose the earlier advantage.
Conversion at a set age. Many policies convert to stepped at around 65, when premiums can rise sharply.
Partial level. Some insurers let you hold part of the cover on stepped and part on level, a useful middle path.

Tax and super effects

The structure does not change the tax treatment. Income protection premiums outside super remain deductible in the year paid, so a higher early level premium gives a larger early deduction. Life, TPD and trauma premiums outside super are not deductible either way. In super, the premium reduces your balance; see the cost of cover in super calculator.

How to compare the two quotes

Ask for both stepped and level quotes for the same cover.
Estimate how long you will keep the cover at that level.
Add up the stepped premiums over that period using the insurer's illustration, which often appears in the quote, and compare with the level total.
Allow for the realistic chance you reduce cover later.
Check what age the level period ends and what happens after.

Frequently asked questions

Can I switch from stepped to level later?

Some insurers allow it, but the level premium will be based on your age at the switch, so the saving is smaller. Check whether the switch needs new health questions.

Why did my level premium go up?

Usually because of indexation of the sum insured or a rate change by the insurer across all policies of that type. Ask the insurer to show how much came from each.

Are hybrid structures available?

Some retail insurers offer premiums that stay level for a set number of years, or a mix of stepped and level cover. Read how they reprice at the end.

Sources

Moneysmart — how life insurance premiums work
ASIC — regulation of disclosure in product disclosure statements
AFCA — complaints about premium increases