Within the insurance world, participants are generally required to pay a premium amount to maintain the policy. This premium can vary depending on your age, health, and the type of insurance policy you buy, but it can also have different payment structures. The makeup refers to the initial amount, how many payments are necessary, if it will increase, and how it might increase.
One type of structure is referred to as a “stepped premium.” Before deciding whether this type of premium would work best, it’s important to understand what it is and the pros and cons associated with it.
Stepped Premiums Defined
Stepped premiums are payment structures available to those that are looking for a smaller amount in the beginning and then progressive “step” increases.
These increments generally depend on factors like age and how long the plan has been active. Some view this idea as paying less and then “catching up” as the amounts increase over the years. Each step could also create a different Internal Rate of Return (IRR) on the death benefit that would be available if the policyholder passes away.
Weighing the Pros and Cons
There are pros and cons with the stepped premium payment structure that you should be familiar with when comparing it to the other payment options available.
Considering the structure of the stepped premium and that it starts lower, it may be considered as a more affordable option for those who cannot afford a higher payment at the current moment. A person in this situation may believe that they’ll be able to afford larger payments as they get older but may experience a change in health that could make the increase in payments a consequence of this type of schedule.
On the other hand, this type of structure could provide maximum IRR at death and allow you to pay less overall — depending on your life expectancy. In other words, someone who participates in a stepped premium structure may pay less over their life than they would have with a different structure.
Key Takeaways
- Stepped premiums refer to a type of payment structure that has “steps”, or different levels — allowing the total expected amount to be stretched over the participant’s life.
- Each level correlates the person’s age and where they’re at in the plan.
- Can be a great option for younger people or those who believe they’ll most likely be able to afford payment increases in the future.
A person’s life expectancy is not guaranteed, so having this option may allow for substantial savings over the course of their life. On the other hand, there could be life events or unexpected circumstances that occur that cause the increases to be unaffordable.
Call Senior Life Services
If you’re reviewing burial insurance options and wondering what kind of premium structure is right for you, we may be able to help. Give us a call at 800-548-3249 for more information.
