Stepped vs Level Life Insurance Premiums: Why the Promise of Level Didn't Deliver

By Christopher Hall, Financial Adviser, AFSL 526688, Arrow Equities  |  Published March 2026  |  Educational content only — not financial advice

Level premiums were designed to cost more upfront and save money over time. For most Australian policyholders who took out level policies between 2015 and 2020, that crossover has not materialised — and in many cases, current modelling suggests it will not arrive until a policyholder's mid-to-late 60s, if at all. Arrow Equities has not recommended a level premium structure to any client in over five years. This article explains why — and what policyholders currently holding level premium policies should consider.

Understanding this issue is relevant to any policyholder who has received a significant premium increase notice on a level policy, or who took out level cover in the expectation of long-term savings. For a broader overview of what to do when a premium increase notice arrives, the Insurance Premium Review Guide sets out the full review framework.

What Are Stepped and Level Premiums?

These are the two structures under which life insurance, income protection, and TPD premiums may be calculated.

Stepped premiums increase each year as the policyholder ages. The annual premium reflects the policyholder's current age and the statistically higher probability of claiming at that age. Stepped premiums are lower in the early years of a policy and increase — sometimes significantly — over time.

Level premiums are set at a higher fixed rate at inception and are designed to remain stable over the life of the policy. The policyholder pays more than the actuarial risk warrants in the early years, with the excess used to subsidise the cost of cover in later years when stepped premiums would otherwise become expensive.

The original value proposition was straightforward: pay more now, pay significantly less later. The crossover point — where cumulative level premiums began to cost less than equivalent stepped premiums — was typically modelled to occur somewhere between years seven and eleven, depending on the policyholder's age at inception.

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What Was the Promise of Level Premiums?

For a policyholder in their mid-30s taking out cover intended to run for 25–30 years, the level premium model made intuitive sense. The stepped premium trajectory — rising with age and accelerating through the 50s and 60s — was well documented. Paying a higher fixed premium in the early years to avoid that trajectory appeared to be a sound long-term financial decision.

Advisers modelling premiums over a 20 or 30-year horizon could show clients a clear crossover point — typically in the policyholder's mid-40s — after which the cumulative cost of level premiums would be lower than the equivalent stepped premium path. The longer the policy was held beyond that point, the greater the saving.

The model was logical. The problem was that it was built on actuarial assumptions about future claims experience that proved to be significantly incorrect.

Why Did Level Premium Costs Blow Out?

The assumptions underlying level premium pricing were built on claims data available at the time the products were designed. What those models did not adequately anticipate was the pace and scale of change in medical diagnosis — particularly the explosion in diagnosed mental health conditions, musculoskeletal disorders, and chronic illness — and the corresponding impact on both the frequency and duration of claims.

Modern diagnostic medicine has, in many respects, been a profound public benefit. Conditions that were previously undiagnosed or misdiagnosed are now identified earlier and treated more effectively. For life insurers, however, this has meant a claims experience substantially more expensive than the original product modelling assumed.

The products — particularly level premium income protection policies — were covering more than the insurers had expected, for longer than they had expected, at a cost the original pricing had not adequately funded. The insurers' only available response was to reprice. And reprice they did.

For level premium policyholders, the repricing was particularly damaging. The entire premise of the structure — that the early years' overpayment would subsidise the later years — was undermined as insurers increased the base level premium year on year to recover from systemic mispricing. The promised stability was not delivered.

Case Study: BT Policies, TAL, and Increases Exceeding 70% in a Single Year

Documented experience from Christopher Hall's policy review practice

(C. Hall, Arrow Equities, proprietary policy review data — 500+ policy reviews)

Across Arrow Equities' review experience, BT life insurance policies — acquired by TAL — showed the most severe mispricing of any product in the review sample. Policyholders holding BT level premium policies experienced increases exceeding 70% in a single renewal year. The following year, further increases of approximately 40% were applied. The year after that, increases of approximately 30% continued.

These are not the characteristics of a premium structure that is functioning as designed. A level premium, by definition, is entered into with the expectation of stability. Increases of this magnitude in consecutive years represent a fundamental failure of the product's core promise.

The increases reflected the extent to which BT's original product pricing had underestimated actual claims experience. When TAL acquired the book, the repricing required to bring the product to a sustainable position was substantial — and the policyholders holding those contracts bore the full cost.

For policyholders whose health remained unchanged, the increases created an opportunity: apply for replacement cover, pass underwriting, and move to a current market product at a lower premium. For policyholders whose health had changed since taking out the policy, no such option existed. They remained in the pool.

Note: Premium increase figures are drawn from Christopher Hall's direct review experience with clients holding BT/TAL level premium policies during this period. Individual policy increases varied based on policy type, sum insured, and specific product terms.

Why Premiums Keep Rising for Those Who Can't Leave

The BT/TAL experience illustrates a broader structural problem that affects any insurance product pool experiencing significant repricing: adverse selection.

When premiums increase materially, policyholders who are healthy enough to pass medical underwriting for a new policy have a rational incentive to leave the existing pool and take out replacement cover at current market rates. They exit. The policyholders who remain are, by definition, disproportionately those whose health has changed since taking out their original policy — and who cannot obtain equivalent replacement cover elsewhere.

The remaining pool is therefore no longer a representative cross-section of insured lives. It is concentrated with policyholders who are statistically more likely to claim — either because their health has already deteriorated, or because they are already on claim. The claims cost of the pool increases. The insurer must increase premiums further to fund those claims. More healthy policyholders who can pass underwriting exit. The pool concentrates further.

This is a self-reinforcing cycle with no natural floor. It does not resolve over time — it accelerates. Policyholders who are trapped in the pool by their medical circumstances face a premium trajectory driven not by their own risk profile, but by the accumulated risk of everyone else who could not leave.

"What remains in a pool after significant repricing is, increasingly, those who need it most and can afford it least — because the people who could leave already have. The premium increases for those remaining are not a reflection of the market. They are a reflection of who is left." — Christopher Hall, Financial Adviser, AFSL 526688, Arrow Equities

Arrow Equities' Position: No Level Premium Recommendations in Over Five Years

Arrow Equities has not recommended a level premium structure to any client in over five years. This position is based on the cumulative modelling experience across 500+ policy reviews.

The core problem is that the crossover point — where cumulative level premiums become less expensive than equivalent stepped premiums — has consistently failed to arrive within a timeframe that makes financial sense for the policyholder. In the modelling Christopher Hall has reviewed over this period, the crossover, where it appears at all, falls in the policyholder's mid-to-late 60s. For a policyholder in their mid-30s, that represents three decades of overpayment before any benefit is realised — and assumes no change in coverage needs, income, family circumstances, or market conditions over that period.

That assumption does not reflect how people's lives actually develop. Mortgages are paid off. Incomes increase. Children grow up and become financially independent. The coverage need that justified the original policy sum insured at age 35 rarely persists unchanged to age 65.

"Level premiums may be appropriate for some clients. We acknowledge that possibility. We simply have not encountered those circumstances in over five years of active review work. Every time we have modelled level versus stepped for a client, the stepped premium has presented as the better long-term financial decision given the client's actual circumstances." — Christopher Hall, Financial Adviser, AFSL 526688, Arrow Equities

This position is held with the explicit caveat that circumstances vary. A client with a specific medical history, occupational risk profile, or unusually long intended coverage period may present differently. Any policyholder considering a structure change should have the modelling done for their specific situation before making a decision.

What Should Policyholders on Level Premiums Do Now?

Three steps for policyholders currently holding level premium policies:

Step 1 — Determine whether medical underwriting is likely to be accepted

Before making any decision about a level premium policy, establish whether a new policy application is likely to succeed. An application with an insurer — conducted while the existing policy remains in force — will indicate whether replacement cover is available and on what terms. This step must happen before any cancellation decision is made. A policyholder who cancels first and then discovers they cannot obtain replacement cover has no recourse. For the consequences of cancelling a policy without this assessment, the risks are covered in detail separately.

Step 2 — Request a cumulative premium projection comparison

Ask a qualified adviser to model the cumulative cost of the existing level policy against current stepped premium alternatives over the remaining intended coverage period. Pay particular attention to where the crossover point falls. If the modelling shows the crossover occurring in the policyholder's 60s, and the policyholder is currently in their 40s, the financial case for remaining on level premiums requires careful scrutiny. It is also worth understanding whether a loyalty tax has accumulated on the existing policy that a market review would address.

Step 3 — Review options based on the underwriting outcome

If medical underwriting is likely to be accepted, a full policy review comparing available alternatives is the appropriate next step. If underwriting is unlikely to be accepted due to changed health circumstances, the existing policy — regardless of its premium trajectory — may be the only cover available. In that case, the policy's value should be assessed on the basis of what it covers and what it would cost to replace if replacement were possible. For policyholders in this position, understanding what features the existing policy holds that may not exist in current market products is an important part of that assessment.

Frequently Asked Questions

Q: What is the difference between stepped and level life insurance premiums?

Stepped premiums increase each year as the policyholder ages, reflecting higher claim probability at older ages. Level premiums are set at a higher fixed rate at inception and are designed to remain stable over the policy life. The original premise was that higher early payments would subsidise later years when stepped premiums would otherwise be expensive.

Q: Why have level insurance premiums increased so much in recent years?

Level premiums were priced on actuarial models that significantly underestimated future claims costs. Advances in medical diagnosis — particularly for mental health, musculoskeletal, and chronic conditions — created a volume and duration of claims the original models did not anticipate. Insurers responded by repricing level premium products upward, in some cases by 30–70% in a single year.

Q: Should I switch from level to stepped premiums?

Switching structures is not a simple administrative change — it typically requires medical underwriting. The appropriate course depends on the policyholder's current health, age, remaining coverage period, and whether the cumulative cost modelling supports a switch. An independent review before making any decision is strongly recommended.

Q: What happened to BT level premium policies after the TAL acquisition?

BT policies acquired by TAL showed the most significant mispricing identified in Arrow Equities' review experience. Policyholders experienced increases exceeding 70% in a single year, followed by further increases of approximately 40% and 30% in subsequent years — reflecting the extent to which the original BT product pricing failed to anticipate actual claims experience. (C. Hall, Arrow Equities, proprietary policy review data)

Q: What is the adverse selection problem in level premium insurance pools?

As level premiums increase significantly, healthy policyholders who can pass underwriting elsewhere tend to exit the pool. Those who remain are disproportionately policyholders whose health has changed and who cannot obtain replacement cover. This concentrates risk in the remaining pool, driving claims costs — and therefore premiums — higher still. The process is self-reinforcing.

Related Articles

• Insurance Premium Review Guide for Australian Families — the full review framework

• Pre-2021 Insurance Policy Features Worth Keeping — what older policies may hold that current products do not

• Should I Cancel My Expensive Life Insurance? — what to assess before making any cancellation decision

• Medical Disclosure in Insurance Applications — what to understand before applying for new cover

For policyholders holding level premium policies who would like an independent assessment of their options, Christopher Hall offers a complimentary policy review. Appointments can be booked via the Arrow Equities bookings page.

About the Author

Christopher Hall is a financial adviser and Principal of Arrow Equities (Rose Bay Equities Pty Ltd, CAR 1304002, AFSL 526688). Christopher has conducted more than 500 life insurance policy reviews and specialises in life risk insurance advice for Australian families. He holds a Bachelor of Commerce and is a specialist life risk adviser registered with Adviser Ratings. Educational Disclaimer: This content is for educational purposes only and does not constitute financial advice. Past performance is no guarantee of future results.

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