Latest Poll – Stepped Versus Level Premium

Should your advice practice be writing a higher proportion of level premium life insurance business?

  • Yes - we need to write more level/hybrid premium (61%)
  • No - we have the balance right between stepped and level (36%)
  • Not sure (3%)

Our latest poll looks at one aspect of the current ‘sustainability’ debate, as we consider whether stepped premiums may be having an adverse impact on the long-term sustainability of the industry.

The immense value of stepped premiums lies in the ability for the client to commence a life insurance policy at a more affordable premium level, based on their risk factor at the time of policy commencement.  Each policy anniversary then heralds an age-based premium increase.

The value of level premium policies relates to the greater prospect of the client retaining the policy for a longer period. If they are able to fund a higher premium level at commencement, they will never be subject to annual age-based premium increases.

That is the simple trade-off: greater initial affordability for stepped premium policies versus greater long-term affordability for level and/or hybrid premium policies.

This issue is being highlighted at the moment because it forms one part of the larger debate about whether Australia’s life insurance industry can remain viable under its current structure.

… affordability is a significant factor contributing to the increasing lapse rates the industry is currently experiencing

Stepped premium remains the dominant choice in the Australian market place.  But how many more clients would retain their cover into their fifties and beyond, when their annual stepped premium increases reach significant levels, if they had been prepared to bite the bullet in their earlier years and opt for level premiums?

Life company research tells us that affordability is a significant factor contributing to the increasing lapse rates the industry is currently experiencing.  The irony seems to be that the relative affordability of stepped premiums is a positive factor at the commencement of the life of the policy.  But as time passes and premiums increase each year, the affordability factor becomes a liability.

The longer a policy stays on the life company’s books, the more robust, viable and profitable becomes that book of business.  With lapse rates increasing, due in no small part to the issue of affordability, this places upwards pressure on prices, which can then lead to issues of longer term sustainability.

There is a place for both stepped and level premium life insurance policies in the Australian market.  They offer clients a clear choice.  The right choice is determined by what is in the best interests of the client.  Our poll question is asking whether the balance between the two options is right in your practice.  Let us know what you think…

  • David

    As a new adviser a few years ago, I was quite attracted by the concept of level premiums and recommended them to many of my clients. But on renewal some of them still got slugged with big “across the board” increases. In their minds level meant “no increases”. It didn’t mean “no age related increases but potentially big increases for other reasons, at the whim of the insurer”. Consequently I no longer use level premiums.

  • Jamie Forster

    Level premiums certainly have a place in our practice depending on the client’s specific circumstances including having certainty that the policy is for a long-term need and their budget at the time.

    However, it is important to remember that for most policies the ‘level’ refers to the original benefit and original terms only.

    Any increases in benefit levels or improvement in terms will be priced based on the client’s age at the time.

    I have seen plenty of situations where this hasn’t been explained to clients resulting in the client being disaffected and put out.

  • David if “in their minds level meant no increases” – there is only one way clients get perceptions and that would be because they lacked a proper explanation of level premiums and did not have their expectations managed. That is down to their adviser.
    Too many clients are not educated properly about level premiums at outset and at review. Yes it’s a bit technical but so are other aspects of your advice and we know clients are more engaged when we remind them regularly what they have bought and why.
    This sort of discussion is viewed by our UK colleagues as amusing – they don’t have stepped premiums as we do and historically level has been the structure the public understand. Given we have a choice then we must help our clients with that understanding.

  • Michael

    Sue, that’s a little unfair. From a few years in complaints management I can assure you that clients remember whatever suits them at the time they decide to complain regardless of notes or even voice recordings!

    Do level rates really make insurance more sustainable as suggested in the article? You could argue that clients who hold their cover long and therefore are more likely to claim would actually impact insures more than churn. An extra 5 years of premium doesn’t make much difference if you need to pay a claim on the policy.

    The fact that level premiums make you beholden to the insurer you chose originally isn’t necessarily a good thing, also the cumulative pay off for level is often so far into the future that the client at a younger age would have been better off with more cover at a time of high need/low risk rather than more cover at a time of lower need but higher risk.

    This poll could have been designed better. Why isn’t a hybrid of both a 3rd option rather than an adjunct to level?