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We take a look at the two structures available: stepped cover and level cover so you can decide which option is best for you. 

What is Stepped Cover?

Stepped insurance cover premiums generally have a lower initial monthly cost, however, they increase annually (usually somewhere between 2% and 15%), meaning as you get older and become a higher claim risk you will pay more in premiums.

Pros of Stepped Cover:

• At the start, stepped cover premiums are usually lower than level cover, making it a more affordable option, particularly if you only need the insurance cover for a short, specific period of time for example until you pay down the majority of your mortgage. 
• If you need to increase or reduce your cover you can often adjust it, which will reflect in the price of your premiums.

Cons of Stepped Cover:

• Cover increases every year making it more difficult to budget.
• The amount that your cover increases varies depending on the insurer but can reach up to 15% which could become unaffordable. 
• Whilst initially costing less, over the years you will pay more for stepped insurance cover compared to level insurance cover.

What is Level Cover?

Unlike stepped cover, level cover locks your premium in at one fixed rate for a set period of time or until a certain age. It costs more than stepped cover initially, however over the years you are likely to save more by choosing level cover. 

Pros of Level Cover:

• The cost remains the same, making it easier to budget especially for those on a fixed income.
• Over the years you can make substantial savings by choosing level insurance cover especially if you keep the policy for more than 10 years. 

Cons of Level Cover:

• When you are younger, level insurance cover often costs more per month than stepped insurance cover which can be a big turn-off to customers. 
• To make the most of the savings level insurance cover requires a long-term commitment. If you cancel or change the policy too soon then you will have overpaid without making savings. 
• Once your policy ends premiums tend to become stepped and you could find yourself paying a lot more than before if you decide you still need cover. 
• Likewise if, when you renew your policy, you have to add in new health issues, you could see an increase in your premium. 

How Much Can You Save by Switching to Level Cover?

Below is an example of how much you could save over the years if you chose level insurance cover compared to stepped insurance cover, based on the stepped insurance policy increasing 4% annually. 

When is the Best Time to Switch to Level Cover?

The best time to switch is as early as your finances allow. If you can afford the higher upfront costs and are planning to hold the policy long-term then choosing level cover will save you money in the long run. And since your level cover rates are calculated based on your age and health at the time you sign up, the younger and healthier you are the lower the rate.

Waiting until your older, when you may have more health issues, can lead to higher premium rates, policy exclusions or you could potentially be unable to choose level cover at all. 
Please remember this is just general advice, if you are looking for insurance options tailored to your finances, lifestyle and needs, get in touch with our insurance team by calling 0800 346 482 or email finance@financehub.co.nz