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Choosing the right insurance premium structure

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Life insurance is an important part of helping to protect you and your family against the “what ifs” of life. As we get older, the chances of suffering an illness or injury increase, so having the right cover becomes even more important.

Unfortunately, insurance premiums also tend to rise with age, simply because you’re more likely to make a claim. In response, many people choose to let their insurance policies lapse right at the time when they need the protection the most.

But there is a way to control the rise of insurance premiums over time.

Stepped v level premiums

For insurance such as life, total and permanent disability, trauma or income protection cover, you may be able to choose between stepped or level premiums.

If you choose stepped premiums, the annual policy premium starts lower, but is recalculated each year upon renewal and tends to increase over time based on your age, as well as factors such as inflation.

Depending on the type of cover, stepped premiums usually start to rise sharply when you reach your 40s or 50s, because there’s more chance of you suffering an insured event and making a claim on your policy.

Level premiums, on the other hand, are higher in the beginning than those for a stepped policy. They tend to be more cost-effective when you hold the insurance cover over an extended period of time, because the premium doesn’t change as you get older.

The only time that level premiums will rise is if you increase your insured benefit, or the insurance company puts up their rates as a result of higher fees or inflation.

Which premium structure to choose?

Stepped premiums are less expensive and are often seen as more affordable when you are younger and have a lower disposable income. Their low initial cost can make them more attractive, but a policy based on this structure will cost significantly more if you hold the policy for the long term. For this reason, stepped premiums are most suitable if the insurance is to meet a short-term need.

Level premiums, on the other hand, seem more expensive initially, but essentially remain at the same rate throughout the life of the contract. And if you’re like most people, the need for life insurance continues for the long term, so choosing level premiums can save you thousands of dollars over this timeframe.

Whatever insurance or premium structure you choose, it is important to review your cover against your needs on a regular basis.

If you would like to discuss this further, or review your insurance cover, please contact your Bongiorno  advisor

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