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Understanding life insurance premium structures: age-based calculations, premium types, risk factors, and the importance of early coverage.
Here's what insurance companies don't advertise: the premium structure you choose can cost you $50,000-$100,000 more over your policy lifetime.
Most Australians default to stepped premiums because they look cheaper when you first get a quote. At age 35, a $500,000 life insurance policy might cost $45/month with stepped premiums versus $85/month for level. The choice seems obvious.
But run those numbers over 25 years and the picture flips completely.
This guide will show you:
Stepped premiums increase each year as you age.
When you take out a policy with stepped premiums, the insurer recalculates your premium annually based on your current age. Since older people have higher mortality and morbidity risk, premiums increase each year.
Year 1 (Age 35): Your premium is calculated based on a 35-year-old's risk profile.
Year 2 (Age 36): Your premium is recalculated for a 36-year-old. It's slightly higher.
Year 20 (Age 55): Your premium reflects the much higher risk of a 55-year-old. It could be 4-6x your original premium.
Here's what a typical stepped premium journey looks like for $500,000 life cover:
| Age | Annual Premium | Cumulative Paid |
|---|---|---|
| 35 | $540 | $540 |
| 40 | $780 | $3,780 |
| 45 | $1,200 | $8,580 |
| 50 | $1,920 | $16,380 |
| 55 | $3,120 | $28,980 |
| 60 | $5,040 | $49,380 |
| 65 | $8,160 | $82,980 |
Key insight: By age 55, you're paying nearly 6x what you started with. By 65, it's 15x your original premium.
ASIC research shows that 40% of Australians who cancel their life insurance cite 'premium affordability' as the main reason. Most of these are people with stepped premiums who reach their 50s and find they can no longer afford coverage.
Level premiums stay the same for the life of your policy.
When you take out a policy with level premiums, the insurer calculates an average premium that accounts for your increasing risk over time. You pay more upfront, but your premium is locked in.
Year 1 (Age 35): Your premium is calculated based on the average risk over your expected policy term (often to age 65 or 70).
Year 2-30: Your premium stays exactly the same (except for CPI adjustments and any insurer-wide rate changes).
Level premiums are fixed based on your age at policy commencement. However, they're not completely frozen:
What's locked in:
What can still change:
Important: Level premiums apply per cover type. If you add a new cover later, that new cover will be priced at level rates based on your age when you add it.
Compare stepped vs level premiums for your exact age and coverage needs. Get quotes from 8+ Australian insurers in 2 minutes.
Get Your Free QuoteLet's look at actual numbers. These examples use indicative rates from major Australian insurers for a healthy 35-year-old non-smoker with $500,000 life cover.
| Premium Type | Year 1 Premium | Year 10 Premium | Total Paid (10 Years) |
|---|---|---|---|
| Stepped | $540/year | $1,080/year | $7,560 |
| Level | $1,020/year | $1,020/year | $10,200 |
At 10 years, stepped premiums save $2,640 (26% less). Level is still recovering its higher initial cost.
| Premium Type | Year 1 Premium | Year 20 Premium | Total Paid (20 Years) |
|---|---|---|---|
| Stepped | $540/year | $2,280/year | $24,600 |
| Level | $1,020/year | $1,020/year | $20,400 |
At 20 years, level premiums save $4,200 (17% less). The crossover has happened.
| Premium Type | Year 1 Premium | Year 30 Premium | Total Paid (30 Years) |
|---|---|---|---|
| Stepped | $540/year | $6,000/year | $67,800 |
| Level | $1,020/year | $1,020/year | $30,600 |
At 30 years, level premiums save $37,200 (55% less). The difference is dramatic.
Here's how cumulative costs compare over time:
Cumulative Premium Cost ($500k Life Cover, Starting Age 35)
$70,000 | ▲ Stepped
| ····/
$60,000 | ····/
| ····/
$50,000 | ····/
| ····/
$40,000 | ····/
| ····/
$30,000 |/·····································▲ Level
| BREAK-EVEN
$20,000 | ↓
| (Year 13-15)
$10,000 | ·····
|····
$0 |----------------------------------------→
Year 1 5 10 15 20 25 30
The break-even point is typically between years 12-15. Before this point, stepped premiums cost less in total. After this point, level premiums save you money every year.
The break-even point depends on several factors:
| Starting Age | Typical Break-Even | Recommendation |
|---|---|---|
| 25-30 | Year 11-13 | Strong case for level |
| 31-40 | Year 12-15 | Level if planning long-term |
| 41-50 | Year 14-17 | Consider hybrid approach |
| 51+ | Year 16-20 | Stepped often makes more sense |
Even if stepped premiums cost more over time, they only cost more IF you keep the policy. Many Australians with stepped premiums cancel coverage in their 50s-60s because premiums become unaffordable. If you cancel, you've paid premiums for decades but have nothing when you need it most.
Stepped premiums aren't always wrong. They're the better choice in specific situations:
Example scenarios:
Why stepped works: You'll never reach the break-even point, so stepped's lower initial cost saves money.
Example scenarios:
Why stepped works: You get coverage now when you can't afford level premiums. You can switch to level later when income increases (though at a higher rate based on your older age).
Example scenarios:
Why stepped works: Less financial commitment if you decide to reduce or cancel coverage.
Example scenarios:
Why stepped works: For cover you'll reduce anyway, stepped makes sense.
Tom, 35, New Home Buyer
$500k stepped: $540/yr now → $7,560 total over 10 years | $500k level: $1,020/yr now → $10,200 total over 10 years
Stepped saves Tom $2,640 over 10 years. Since he plans to reduce cover as his mortgage shrinks, stepped premiums align perfectly with his decreasing needs.
Level premiums are typically better for long-term insurance needs:
Example scenarios:
Why level works: After 15 years, you're saving money every single year. Over 30 years, savings can exceed $40,000.
Example scenarios:
Why level works: Knowing your premium won't surprise you provides peace of mind and easier budgeting.
Example scenarios:
Why level works: A fixed premium is easier to plan for than one that increases unpredictably.
Example scenarios:
Why level works: Protects you from the same fate.
Sarah, 38, Professional with Young Family
$750k stepped over 25 years: ~$52,000 total | $750k level over 25 years: ~$31,000 total | Savings: $21,000
Level premiums save Sarah $21,000 over 25 years. With a 20+ year timeframe and preference for predictable budgeting, level is the clear winner.
Our advisers can model both scenarios with your exact details and show you the lifetime cost difference.
Talk to an AdviserMany savvy Australians use a combination of stepped and level premiums.
Core coverage on level premiums:
Top-up coverage on stepped premiums:
Maria, 36, needs $1,000,000 total life cover:
Option A: All Stepped
Option B: All Level
Option C: Hybrid (Recommended)
The hybrid approach saves Maria $25,000 compared to all-stepped AND $9,000 compared to all-level.
| Feature | Stepped | Level(Recommended) | Hybrid |
|---|---|---|---|
| Initial Cost | Lowest | Highest | Medium |
| Long-term Cost (20+ years) | Highest | Lowest | Lower than stepped |
| Budget Predictability | Poor (increases annually) | Excellent (fixed for life) | Good (core cover fixed) |
| Flexibility to Reduce | Excellent | Moderate | Good (can reduce stepped portion) |
| Risk of Unaffordability | High (premiums may become unaffordable) | Low (locked in rate) | Low (core protected by level) |
| Best For | Short-term needs, tight budget, uncertain future | Long-term needs, budget certainty, 15+ year plans | Mixed needs, optimization, reducing coverage over time |
Source: Based on indicative pricing from major Australian life insurers, January 2026
Yes, most insurers allow this. You can convert stepped premiums to level at any time.
Important considerations:
Example: John took out stepped premiums at 35. At 45, he wants to switch to level.
No. This is a one-way door. Once you have level premiums, you cannot convert to stepped.
The reasoning: Insurers would face adverse selection. People would use level premiums while young (when level is relatively expensive) then switch to stepped when older (when stepped is relatively cheaper compared to continuing level). This would undermine the whole system.
If you're considering switching from stepped to level, do it sooner rather than later. Every year you wait, your level premium rate increases. A 45-year-old pays significantly more for level premiums than a 40-year-old for the same cover.
Different insurance products handle premium structures differently:
Both stepped and level widely available.
Most insurers offer both options. Level premiums typically run to age 65 or 70. This is the most common product for level premiums.
Both stepped and level usually available.
Similar to life insurance, most insurers offer both options. Level TPD premiums often run to age 60 or 65.
Both stepped and level usually available, but more variation.
Some insurers only offer stepped for trauma cover. Check with your insurer or adviser.
Predominantly stepped premiums.
Most income protection policies use stepped premiums due to the different nature of the risk (ongoing income replacement vs. lump sum). However, some insurers offer level options:
If level income protection is important to you, AIA, TAL, and Zurich all offer level options with varying terms.
Alex, 28, Engineer
Stepped now: $35/month | Level now: $65/month | Switch to level at 35: ~$85/month (but locked for life)
Alex could start with stepped ($420/year saving), then switch to level in 5-7 years when income is higher and needs are clearer. The key is switching before the break-even point.
David and Emma, both 42, Two Teenagers
All stepped over 20 years: ~$98,000 | Hybrid ($900k level + $600k stepped): ~$71,000 | Savings: $27,000
The hybrid approach is ideal: level premiums on $900k core cover (maintained long-term) and stepped on $600k (to be reduced as mortgage shrinks and kids become independent).
Michelle, 52, Recently Divorced
Stepped over 10 years: ~$18,000 | Level over 10 years: ~$26,000 | Stepped saves: $8,000
At 52 with only 10 years of coverage needed, Michelle won't reach the break-even point. Stepped premiums make sense here, saving $8,000 over the policy term.
How long will you need life insurance?
| Your Answer | Premium Recommendation |
|---|---|
| 5-10 years | Stepped |
| 10-15 years | Consider hybrid or run the numbers |
| 15-25 years | Level (or hybrid) |
| 25+ years or uncertain/long-term | Level |
Can you afford level premiums now?
Will your insurance needs decrease over time?
Will you be able to afford insurance at 55? At 60?
This might be the most important question. Many Australians with stepped premiums are forced to cancel coverage in their 50s and 60s because premiums become unaffordable.
If you're not confident you'll have significantly higher income or investment assets to cover escalating stepped premiums, level or hybrid is safer.
Get indicative quotes showing both stepped and level premiums for your exact situation. See the 10, 20, and 30-year cost difference.
Get Your Free ComparisonStepped premiums start low and increase each year as you age. Level premiums start higher but stay the same (or only increase with inflation) for the policy term. Over 15+ years, level premiums typically cost 30-50% less in total.
It depends on how long you keep the policy. If keeping cover for under 10-12 years, stepped is usually cheaper. If keeping cover for 15+ years, level premiums typically save 30-50% in total cost.
Yes, most insurers allow you to switch from stepped to level at any time. However, your level premium will be based on your age at the time of switching (not your original age), so it will be higher than if you'd chosen level from the start. You cannot switch from level back to stepped.
Level premiums can increase for two reasons: CPI inflation adjustments (typically 2-3% annually) and insurer-wide premium rate increases. However, they do not increase due to your age. The age-based component is locked in when you take out the policy.
If you reduce your sum insured on a level premium policy, your premium decreases proportionally. However, you cannot recalculate your rate based on a shorter term or change the premium structure.
Level premiums are most common for life insurance and TPD insurance. Income protection predominantly uses stepped premiums, though some insurers (AIA, TAL, Zurich) offer level options. Trauma insurance availability varies by insurer.
The ideal age to lock in level premiums is between 30-45 when you have established long-term insurance needs and premiums are still relatively affordable. After 50, the higher initial premium becomes harder to recover through long-term savings.
Yes. The hybrid approach is increasingly popular: level premiums on core long-term coverage (60-70% of total) and stepped premiums on additional cover you may reduce over time (30-40% of total). This optimizes both cost and flexibility.
Stepped premiums start low but can become 10-15x higher by age 65. Total cost over 20+ years is typically 50-100% more than level.
Level premiums cost more initially but save money long-term. The break-even point is usually 12-15 years.
The hybrid approach offers the best of both worlds: level for essential long-term cover, stepped for flexible top-up amounts.
Age matters for the decision: Under 45 with long-term needs? Level. Over 50 or short-term needs? Stepped may make sense.
Affordability is the hidden risk: 40% of Australians who cancel insurance cite unaffordable premiums. Level protects against this.
General Advice Only
Authorised Representative Number: 1244847 | Australian Financial Services Licence: 246623
Last updated: January 29, 2026
Sources: This guide uses indicative premium data from major Australian life insurers including AIA, TAL, MLC, OnePath, and Zurich. Actual premiums vary based on individual circumstances including age, health, smoking status, occupation, and cover amount. Always obtain indicative quotes specific to your circumstances and consider seeking advice from a licensed financial adviser.