Stepped Policy vs. Level Policy – Which is Right for You?

Insurance policies are often more complicated than they need to be, but typically this confusion comes from the sheer number of options companies offer their clients.

With an income protection policy, you’ll need to choose between different premiums as these suggest how much you’ll pay at the start of the plan and how frequently your plan rates will rise. Let’s take a look.

What Income Protection Insurance Covers

For the most part, income protection policies will cover 85% of your pre-tax income for a specific time, which is outlined by your policy type.

Insurers will total up the amount of money you’ve made over the course of 12 months and dole it out in the event you’re injured or too sick to work. However, what constitutes “too sick or injured to work” is up to the insurer and/or plan. 

Income Protection Insurance Policy Types

The amount of premiums you pay for a stepped or level policy is determined by the type of policy you buy.

More expensive policies will cost you more per year in premiums. As of writing this, insurance companies will offer two policy types: indemnity value and agreed value.

• Indemnity value policies insure you for the amount of money you make as soon as you make a claim. These policy types are typically cheaper because the amount insured does not go up if the client makes more money, but they will go down if they make less.

• Agreed value policies insure you for the percentage amount agreed upon by the insurer. These are much more expensive, but you’re guaranteed a certain amount that won’t change regardless if you make more or less money after making a claim. 

The cost of your insurance premiums are also determined by other factors:

• Benefits Period: The length of time you are covered under income protection. Long benefit periods, such as up to a specific age, are more expensive. Most benefit periods will last 1-5 years and are then renewed after the term ends at a higher monthly rate.

• Waiting Period: The length of time it takes before you can use your income protection policy. The shortest wait period is 14 days, with long wait periods stretching as far as 2 years. You still need to be unable to work after your waiting period to receive benefits.

Finally, your premiums are affected by stepped or level premiums based on your policy type.

Stepped vs. Level Premiums

Stepped premiums typically start out cheaper but become more expensive as you age, while level premiums are more expensive initially but don’t increase as you age.

Level premiums may increase if you make a significant change to your lifestyle (picking up smoking or heavy drinking habits). Level premiums will increase with inflation and revert to stepped premiums after age 65.

Stepped Premiums Pros: Cheaper when you are first insured and more suitable for people who don’t want long-term life insurance. Stepped is better for older individuals past 65-70.

Stepped Premiums Cons: If you keep this policy premium for a long time, you’ll pay more over the life of the policy. These premiums will be more challenging to maintain when you’re older.

Level Premiums Pros: Cheaper in the long term and ideal for anyone who wants long-term reassurance. Plus, you can roughly budget for premiums because they’re more consistent.

Level Premiums Cons: More expensive upfront, which could be costly for anyone nearing 65. You’ll eventually need to switch to stepped, which may erode the savings you made.

Choosing the right premium type for your needs is determined by how long you wish to hold on to your life insurance policy. If you’re planning to keep it in the long term, level premiums will lead to more savings.
If you only want income protection for a limited time, stepped premiums are less expensive. Depending on your age, you may be able to get a hybrid of both premiums.