Most Kiwis who take out a life insurance policy tend to choose the cheaper premium. It feels like a sensible decision in the moment, but, for a surprising number of people, it turns out to be the wrong one.
Not because the cheaper option is bad, it has its place, but because the decision of which premium structure to choose is one of the most important decisions in the life of an insurance policy, and most people make it without fully understanding what they are actually deciding.
Here is what you need to know to make the right call for your situation.
Two ways to pay for the same cover
Life insurance and many other types of personal cover including income protection and trauma cover can be structured in one of two ways. The cover itself is identical but what changes is how you pay for it over time.
Stepped premiums are recalculated every year based on your age. Your statistical risk of claiming increases as you get older resulting in a rising insurance cost year on year. They start low – attractively so – and rise steadily, then sharply, as the years pass. Most New Zealand life insurance is sold on a stepped basis.
Level premiums are fixed for the term of the policy, typically through to age 65, 70, 80, or even through to 100, at the time you take it out. They start higher than stepped, because the insurer is averaging the cost of cover across your entire remaining term, and they do not rise with age. The premium you pay in year one is the exact same premium you pay in year twenty.
What does this look like in real numbers: For a 30-year-old non-smoking male with $500,000 of life cover to age 80, a stepped premium might start at around $35 per month. The level premium for the same cover would be around $75 per month – roughly double. Fast forward 25 years. The person on stepped premiums is now 55 and paying upwards of $200 per month for the same cover – and that figure will keep climbing. The person on level premiums is still paying $75. Research shows cumulative stepped costs typically overtake level costs somewhere between ages 45 and 55, with the total gap in premiums paid reaching as much as 70% over a long policy lifetime
Most people default to stepped without realising the consequences
Stepped premiums dominate the New Zealand market. Their lower starting cost makes them the easier sell, and when a 32-year-old is looking at a $40 per month difference, stepped feels obvious. The problem arrives gradually, then suddenly.
Premiums that felt manageable at 35 become uncomfortable at 45, and by 55 or 60 they can become genuinely unaffordable. Asteron Life has noted that many New Zealanders are forced to cancel essential insurance in their 50s and 60s precisely because stepped increases have made the premium unsustainable – at exactly the age when the probability of needing to claim is highest. They have paid into a policy for decades and cancel before they ever see the benefit.
The question that changes the conversation… A financial adviser will not just ask what you can afford to pay today. They will ask: how long do you need this cover? What is it protecting? Is the cheapest option today still going to be affordable and still in place when you actually need it? Those questions change the answer for a lot of people.
Who level premiums are genuinely right for
Level premiums are not right for everyone, but there is a clear profile of person and a clear set of circumstances, where they are not just a good idea but the strategically correct choice. The common thread is a long-term need for cover that does not have a neat finish line.
Here are the situations where experienced advisers will almost always recommend level, or at minimum a level component:
Farm and business succession
When a farming family wants to pass the land to the child who works it without leaving the other children with nothing, life insurance is often the mechanism. The farming child takes the farm; the policy funds a lump sum payment to the non-farming siblings, equalising the estate without forcing a sale. That need does not end when a mortgage is paid off – it ends when the policy owner dies, which could be at 68 or at 89. A stepped premium that becomes unaffordable at 72 and gets cancelled defeats the entire purpose.
Lifelong care for a disabled dependant
For parents of a child with a permanent disability, the question is not “what happens if I die before my mortgage is paid?” it is “what happens to my child after I am gone?” That need has no end date. Level cover to age 80 or 100, taken out while the parent is still young enough for premiums to be set at a reasonable rate, is the structure that protects this.
Blended families and relationship property
New Zealand’s relationship property laws mean that in a blended family situation, the surviving partner may inherit the bulk of an estate – potentially leaving children from a previous relationship with very little. A properly structured life insurance policy can ensure those children receive a defined sum on death without estate disputes or competing claims. This is a long-term planning need, and level premiums are what keep it in place.
Funeral and final debt certainty
Funerals in New Zealand can cost anywhere between $10,000 and $18,000. A modest life policy held specifically to cover this cost, so the responsibility does not fall on family, is a defined long-term need. The premium needs to be predictable and sustainable, which is a description of level cover, not stepped.
Estate equalisation where assets are illiquid
Property, farms, and family businesses cannot easily be divided. If your estate consists primarily of illiquid assets and you want to treat all your children equitably, life insurance creates the cash to make that possible. This need exists for as long as those assets exist – typically for life.
When stepped premiums are the right answer
Stepped premiums are not the wrong choice – they are the wrong choice for the wrong situation. For short-to-medium term needs, they are often exactly right.
A 10 or 15-year mortgage, cover while children are young and financially dependent, a business loan with a fixed repayment date. If the need has a clear end point within the next decade or so, stepped premiums will almost certainly cost less over that period than level – you never reach the expensive later years of the curve, so the lower early premiums work in your favour.
The critical insight is not that one structure is universally better. It is that the right structure depends entirely on how long you need the cover and what it is protecting. That is a conversation, not a calculation.
The hybrid approach: level for the long term, stepped for the short
For many Kiwis, the right answer is not a choice between level and stepped – it is a combination of both, each doing a specific job.
A common structure: level premiums for the core, permanent need – the estate planning component, the disabled dependant provision, the funeral costs – and stepped premiums for the additional cover relating to a shorter-term obligation like a mortgage or income replacement while children are at home. As the mortgage reduces and the children become independent, the stepped component reduces or is removed. The level component remains in place, doing its job, at the same premium it always was.
Why most people never think to ask about this: A hybrid structure requires someone to sit down with you, understand what your cover is actually for, identify which parts of that need are permanent and which are temporary, and then design a policy structure around those two different time horizons. It is not something that emerges from a comparison website or a direct insurer quote. It is what financial advice is for.
One detail almost nobody thinks to check: cover to age 100
Some policies provide cover through to age 100 – the right tool for long-term planning needs around succession, dependant care, or guaranteed estate provision. But there is a detail buried in some policy wordings that matters enormously: what happens to the premiums at age 100?
On some policies, the level premium stops at 100 and the policy either terminates or converts to stepped. On others, the level premium genuinely holds to 100 and the policy matures. These are very different outcomes, and the distinction is not always obvious in the product summary. An adviser should be checking this specific detail before recommending any long-term product.
Why would someone need cover to age 100? A farming or business succession arrangement that needs to be funded whenever death occurs. The ongoing care of a permanently disabled dependant, a guaranteed funeral provision, a defined estate equalisation plan where assets cannot be liquidated in advance. These are not niche situations – they apply to a significant number of New Zealand families, and they require cover that will genuinely be there, at a premium that will genuinely remain manageable, regardless of how long the person lives.
The right structure for your situation – not the default
For many Kiwis, the difference between stepped and level premiums is the difference between cover that is still in place when they need it and cover that became unaffordable and was cancelled years earlier. It is the difference between an estate plan that works and one that falls over because a key component became too expensive to hold.
A registered financial adviser can:
– Assess whether your current policy is on the right premium structure for your long-term needs
– Model the total cost of stepped vs level vs hybrid structures over your actual expected holding period
– Identify whether any part of your insurance need is permanent – succession, dependant care, estate planning – and structure that component on level premiums accordingly
– Check the fine print on long-term policies, including what happens to premiums at the policy’s maximum term
– Design a structure that evolves with your life – level for the permanent need, stepped for the temporary one
Making a well-informed decision with proper advice and a full view of what you are actually deciding can save you thousands of dollars and ensure your cover is still in place when it matters most.
