Why would a person select a level premium vs an age rated premium?
When a policyholder chooses a level funding pattern, they are choosing to a pay the same premium throughout the term of their policy. When choosing a level premium pattern, one is prefunding one’s risk cost by overpaying in the earlier years and underpaying in the later years of one’s policy term. An age-rated pattern is one where the premium increases approximately in line with the risk cost of the policyholder and therefore the policyholder pays less in the beginning where their risk cost is lower and more later on where their risk cost increases. A policyholder would want to choose an age-rated pattern where affordability is an issue in the beginning and so the policyholder wants cheaper premiums upfront but does not mind the fact that premiums will increase in the future since they expect their income to increase as well. The Graph below illustrates the difference between level and age rated premiums.
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