Stepped vs level premiums: how each works, and why both can rise

We’re Maciej Stanek and Imran Amjad, financial advisers at Véurr Financial Planning in Canberra. This page explains how each structure works and what an adviser looks at. It does not say which structure suits anyone: that depends on circumstances a web page can’t see.

How a stepped premium works

The Australian Financial Complaints Authority (AFCA) describes stepped premiums as very common in Australian life insurance, and explains why they rise with age: statistically, older people are much more likely to die or suffer an illness or injury than younger people. Moneysmart describes the same two structures for income protection as for life cover.

How a level premium works

“Level” describes the absence of a yearly increase for age, not a fixed price. AFCA says level premium policies “can and do increase”, and that there have been significant increases for many of them because of an increased number of claims.

Moneysmart also notes that some policies keep premiums fixed for a set time and then change, so the way a premium is worked out can itself change during a policy. Whether a policy does this, and when, is set out in its Product Disclosure Statement (PDS).

Why are level premiums now called variable premiums?

In a joint review with APRA that began in late 2022, ASIC observed that people who complained about increases on level premiums were generally under the mistaken impression that their premiums would not change. Life insurers have since adopted new labels: “variable premium” replaces “level premium”, and “variable age-stepped premium” replaces “stepped premium”.

The regulators’ update of 5 June 2025 says the old labels failed to communicate that premiums could change, that the word “level” created a false perception of premium stability, and that insurers’ selling practices contributed to it. The new labels still mark the difference between the two structures while making clear that either can change. A policy schedule from some years ago may say “level” where a quote today says “variable”.

Why do premiums go up even on a level premium?

The Australian Financial Complaints Authority (AFCA) gives three main reasons life insurance premiums increase: age (on stepped premiums), changes to the insurer’s premium rates, and increases to the cover amount through inflation indexation. A level premium removes the yearly increase for age; the other two still apply.

• Rate changes. Most policies let the insurer raise premium rates, including on level premiums. AFCA says these changes apply to many policyholders at once rather than singling one out, and are usually justified by factors the insurer did not anticipate, such as higher than expected claims.
• Indexation. Many policies increase the cover amount each year to keep up with inflation, and the premium rises with it, on a level premium too. AFCA notes that automatic increases can be declined by contacting the insurer at renewal; the cover amount then stays where it is instead of rising with inflation.
• Discounts that end. AFCA gives the example of a 50% first-year discount that returns to the full premium after the first year. ASIC and APRA also describe “duration-based pricing”, where recently underwritten customers are charged less and the effect wears off over time, with premiums rising as it does.

For individual cover arranged through financial advisers, ASIC and APRA report that the average annual premium increased significantly over the five years to December 2024, because of cover indexation, age-based increases and increases in base premium rates. Moneysmart’s summary applies to both structures: premiums “are not guaranteed and may change annually”.

Is a stepped or a level premium better?

Neither is better in general. A stepped premium costs less at the start and rises with age; a level premium costs more at the start in exchange for greater stability over time. Whether either works out cheaper overall depends on how long the cover is kept and on future rate changes that no one can know when the policy begins.

ASIC and APRA note that insurers design variable premiums to be held over a long period, and that most insurers’ Target Market Determinations (TMDs) now describe premium structure as a key attribute. How long the cover is likely to be needed is therefore one question an adviser asks. It is not the only one: what the household can afford now, whether the cover is likely to be reduced or cancelled later, and future rate changes all bear on it. Two households that look alike can reasonably end up with different structures, or decide that the amount of cover is what needs to change.

What an adviser works through before either is chosen

If someone sat down with an adviser about premium structure, these are the questions the conversation would cover. The answers differ from one household to the next, which is why this page can’t give them.

• How long is the cover likely to be needed? For how many years would debts and dependants rely on it, and when is retirement expected? (Our five illustrative scenarios show how differently that question can land.)
• What does the policy say about premiums? How and when the insurer can change its rates, whether the way premiums are worked out changes after a set time, and who the TMD says each premium structure is designed for.
• Is the current premium discounted? If so, by how much, for how long, and what the premium becomes once the discount ends.
• Is the cover indexed? How much of each year’s increase comes from indexation, and what declining it would mean for the cover’s value over time.
• Is the cover inside super? There, premiums come out of the super balance, which Moneysmart notes reduces retirement savings, and can matter more close to retirement. The fund’s annual statement and PDS show what the cover is and what it costs.
• What if the premium becomes hard to afford? AFCA lists things to discuss with the insurer, adviser or fund: the cover amount, the waiting period, how long benefits are paid, and indexation. In financial hardship, an insurer may be able to offer a short-term premium holiday or waiver.
• For an existing policy, what would a change give up? Whether the structure can be changed at all, on what terms, and what replacing the policy would lose. Income protection written before 1 October 2021 is one example: APRA set expectations for new policies from that date that older ones are not subject to. More in our guide to income protection for high-income earners.

How life, TPD, trauma and income protection fit together is set out on our page on income protection and life insurance advice in Canberra.