Stepped costs get steep: What you need to know about life insurance

First it was $38. Then it was $97. You can see where this is going. But I couldn’t, exactly.

There was no way of telling how much my life, disability and trauma insurance premiums would rise in the years to come. They obviously weren’t staying flat! And since my previous experience with life insurance had “level” payments instead of these “stepped” ones that advance with age, I could not imagine how high these were headed.

This is one of the chief things to grapple with when buying insurance these days – costs spiral up as we go along.  It makes it challenging to know what we’re in for and plan ahead.

According to industry expert Russell Hutchinson, who runs a platform that advisers use for quoting, “93% of all the quotes done by advisers on Quotemonster are for stepped premiums”. He says policies that don’t come with advice (like mine) will probably have stepped premiums even more often. These can be sold online or through a bank call centre – about a third of all sales.

Imagine if our payments were like this when buying a car, say for $20,000. Instead of being fixed at $455 a month for five years, payments would instead go:

$346
$395
$455
$535
$615

Ouch. I might be sold on that $346, the $395 might still seem manageable, but by $615 the budget would be blown out.

Now obviously insurance products are not cars. The risks increase as we grow older, so the premiums are set up to reflect this. But the experience of buying and maintaining insurance can be downright challenging as a result.

A solution? Find a good insurance adviser who can give you some visibility as to what you’re getting into. As always, good advice is like gold.

After that first questionable online experience, I found an adviser who laid out a new solution with level or stepped options. It went something like this – I could lock in a monthly premium of $54.68 for 20 years, or my payments would lift like so:

$28.21
$30.94
$33.66
$36.82
$40.69
$45.43
$50.06
$55.27
$61.14
$68.99
$77.18
$87.62
$97.70
$109.11
$128.81
$147.44
$167.21
$191.21
$218.42
$251.19

You get the idea. At last it was visible so I could plan ahead.

My guess is that, when we have the choice, most of us are choosing the stepped option, based on its lower starter rate – getting more coverage for less money at first. In the first year, in this example, we’d pay $339 for the stepped option vs $656 for the level amounts.

But shouldn’t insurance be for the long term? Held over 20 years, it’s quite a different picture. Choosing stepped monthly payments would mean forking over $23,125. With the level payments, it would come to $10,000 less: $13,123.

That’s how this story of runaway premiums goes. It makes it worthwhile to get advice, and check our insurances yearly – preferably just before they step up. This way we can gauge if we’re getting the value we need for the higher premiums we’ll be paying over the next year.