Stepped vs Level Premiums: What Most Kiwis Get Wrong About Life Cover

Let’s be honest, when you’re choosing life insurance, the last thing you want is a complicated sales pitch or a spreadsheet full of numbers. Most people just want to know what the smarter option is. And that’s where things get interesting, because the cheaper option today might cost you far more in the long run.

We’re talking about the two main types of life insurance premium structures available in New Zealand: stepped and level premiums. At Pulse Advice, we’ve seen time and time again how this decision can impact someone’s long-term financial wellbeing. So, let’s unpack it clearly and simply.

What Are Stepped and Level Premiums?

Think of life insurance premiums like how you pay for a subscription. You’ve got two options.

Stepped premiums start low but increase each year as you get older. Insurers do this because your risk increases with age, so they adjust the price accordingly. It feels like a good deal early on, especially if you’re young and healthy, but it doesn’t stay cheap for long.

Level premiums start higher, but they stay the same for a fixed term, usually to age 65 or 80. You’re locking in a price now that won’t change with your age. Over time, this structure can save you a significant amount of money and reduce the risk of your cover becoming unaffordable later in life.

How It Works in New Zealand

In New Zealand, most major insurers offer both stepped and level premium options. Stepped premiums are more common for new buyers because they appear cheaper upfront. Level premiums require more of an investment early on, but the key benefit is that your costs don’t increase over time.

Most level premium policies are structured to remain fixed until a certain age. After that, you might be given the option to convert to stepped premiums, or the policy could simply end. The big advantage? You’re not penalised for getting older, and that stability can be a game-changer when you’re budgeting for the future.

Comparing the Cost Over Time

Let’s say you’re a healthy 30-year-old buying a life insurance policy for $500,000. Here’s how your monthly premiums might look over time under each structure:

Age	Stepped Premium	Level Premium
30	$25	$45
40	$42	$45
50	$85	$45
60	$160	$45
65	$210	$45

These figures are indicative only and will vary by insurer, cover amount, health status, and other factors.

You can see that while stepped premiums start lower, they quickly catch up and eventually surpass the level premium. By your 50s and 60s, the cost difference is significant. And unfortunately, that’s often the point when people need their cover the most, but also when they start to find it unaffordable.

Why People Cancel When They Need It Most

Here’s the problem we see all too often. A client takes out a stepped premium policy in their 30s because it fits the budget. Fast forward 20 or 30 years, and the premiums have skyrocketed. Life expenses have increased, maybe there’s a mortgage, kids, or health concerns, and suddenly, keeping the policy going is a struggle.

When people cancel at this stage, they’re left exposed at a time when getting new cover is difficult, expensive, or even impossible due to age or health changes.

The harsh reality? Many people end up paying into life cover for decades, only to let it go just before it would have made a real difference.

Why Level Premiums Can Be Worth the Higher Upfront Cost

It’s tempting to go with the cheaper option now, especially if you’re on a tight budget. But if you’re thinking long term, level premiums often make more sense.

Here’s why:

• You lock in your premium at a younger age while you’re healthy, which means you avoid the price hikes that come with age.
  
• Budgeting becomes easier. You’ll know exactly what you’re paying each month or year, with no surprises.
  
• It reduces the likelihood of cancelling due to affordability. That means you’re more likely to keep the cover in place when it matters most.
  

Over the life of the policy, level premiums can actually cost less than stepped premiums. And even when they don’t, the financial certainty they provide can be invaluable.

When Stepped Premiums Might Make Sense

Stepped premiums aren’t always the wrong choice. They can be a good fit for:

• Short-term cover, such as during a mortgage term or while raising young kids.
  
• People in their 20s or early 30s who expect their income to increase significantly over time.
  
• Anyone who can only afford a smaller premium now, with the intention to review their cover later.
  

But that “intention to review later” can often get lost in the shuffle of life. If you’re planning to switch to level premiums in the future, just be aware that the older you are, the more expensive it becomes.

What We Recommend at Pulse Advice

Every person’s situation is different. But in most cases, if you’re planning to have life insurance in place for more than 10 years, level premiums are worth a serious look.

If your budget allows, it can make a huge difference down the road – both in terms of cost and peace of mind.

In some cases, we recommend a blend of both structures: starting with level premiums for your core long-term cover, and using stepped premiums for any short-term or top-up needs. That way, you get the best of both worlds.

We also take time to run the numbers with you so you can see what your premiums are likely to look like over the next 20 or 30 years. Having that visibility can make your decision much easier.

FAQs

Can I switch from stepped to level later on?
Yes, most insurers allow you to change. However, your new level premium will be based on your age at the time you switch – and potentially your health too. The earlier you lock it in, the cheaper it’ll be.

Do level premiums stay the same forever?

Not necessarily. They usually stay fixed until a certain age, such as 65 or 80. After that, the insurer may allow you to continue the cover, but it might switch to stepped or be subject to new conditions.

Can I mix stepped and level premiums?
Yes, many policies allow for a split between stepped and level. This can be useful if you have both short-term and long-term insurance needs.

What happens if I cancel my policy?
You’ll lose your life insurance cover. If your health has changed since you took out the policy, getting new cover could be harder and more expensive – or even impossible.

Ready to Chat?

Choosing the right premium structure is more than just picking the cheapest option today. It’s about protecting yourself, your family, and your financial future in a way that’s sustainable and smart.

Not sure what the best option is for your situation? That’s what we’re here for.

Chat to one of our advisers today and let’s make sure you’ve got the right cover, at the right price, for the long run.

Disclaimer: This article is for general information only and should not be taken as personalised financial advice. Everyone’s circumstances are different, so we recommend speaking with a licensed financial adviser before making any insurance or investment decisions.