Stepped Vs Level Loans: What’s the Difference?

When it comes to loans, life insurance, and financial security, you have more choices than you may think. From options like income protection to disability benefits and long-term illness coverage, there are ways that your insurance policy and loans can provide ample protection for your family. You also need to think about whether or not you want to look into stepped or level loans and life insurance as the choice can make a major difference.

Level loans and insurance

Essentially, level insurance policies and loans carry the same premium each month based on the age you are when you take out the policy. You can adjust the level of coverage and monthly benefit to adjust alongside inflation, too. Of course, the premium will still increase as a result but, barring further changes to your policy, you won’t face further increases. Many respondents attest that this is a great way to save money in the long-term, especially for those who require financial aid for surgery or long-term sickness as these carry fairly high costs.

A downside of level insurance policies and loans is that, since they’re fairly unchanging, they don’t account for changes in your own occupation and employment status, and there’s less premium flexibility. This means that, regardless of age, the unchanging premium will have a definite impact on your monthly finances. If paying the level premium doesn’t seem feasible, you may want to consider different options to supplement your financial situation, like income protection insurance, which can address your overall income protection gap when paying a level policy.

Stepped loans and insurance

Stepped policies and loans work a fair deal differently and are more useful in different situations than their level counterparts. Stepped loan premiums start out low and increase over time. It’s useful for saving money in the short term as a form of income protection (though some debate whether or not it covers the income protection gap offered by income protection insurance). For life insurance, it’s a great way to ensure early coverage while being able to know that your loved ones are protected.

One of the primary drawbacks to stepped loans is that it’s difficult to predict how your premiums may shift over time and when exactly that may happen. In income protection scenarios, stepped premiums may increase or decrease if your own occupation is low or high risk. The income protection gap is more visible here and is harder to account for over time, though it’s useful for securing coverage immediately. Pending eligibility, you may be able to reevaluate your policy at a later date.

Length of policies and loans

One of the bigger differences between the premiums you’ll pay on loans versus those on life insurance policies is their overall length. With life insurance and disability insurance, it’s not possible to forecast the future but it’s generally understood that these are fairly long-term policies. There’s also a waiting period involved with life insurance that dictates the length of time before funds are made available to your family.

On the other hand, loans are often short-term investments that are meant to be repaid quickly. If you’re using either type of loan as an income protection gap, for instance, you’ll likely not want to carry a premium around with you for the long term. This is because, while an income protection gap can be helpful, it will end up digging into your finances. While there are exceptions to each of these scenarios, it’s generally true that loans and insurance are useful for different lengths of time.

Choosing the right loan or insurance policy can be daunting, but you don’t have to do it alone. Compare income protection insurance with iSelect to choose the policy that works for you.