Life insurance premiums are predominantly based on the risk of certain events happening to you.

Because health risks increase with age, life insurance premiums will generally increase over time. That’s why most insurers offer two common ways of paying for, and managing, the costs of your cover over time:

1. Stepped premiums: when the cost of your cover is recalculated each year based on your age at your policy anniversary. Generally this means your premium will increase each year as you get older

2. Level premiums: where premiums are calculated based on your age when any cover started. Your premium is generally averaged out over a number of years, which means you avoid increases in your premium due to age at each policy anniversary. This means your cover is more expensive than ‘stepped premiums’ at the beginning of your policy, but generally gets cheaper (relative to stepped premiums) as your policy continues.

Regardless of whether your policy is on stepped or level premium, premium rates and premium factors are not guaranteed or fixed and many life insurers in Australia have repriced premium rates in the past.

Stepped or level premiums – which is right for you? 

Generally, this depends on how long you’re planning on keeping your insurance. If you’re planning on keeping your policy for longer than 10-12 years, level premiums may save you money over the life of your policy.

You may also be able to use a combination of stepped and level premiums.

For example, if you think you might want to reduce your level of cover down the track (e.g. when you're kids are grown up or you've paid down debt), you may be able to use level premiums for the portion of cover you think you'll keep longer and stepped premiums for the additional cover.

This is something your financial adviser can help you with.

Repricing is a possibility regardless of which structure you choose

It’s important to note that at policy anniversary the premium may still increase (even with level premiums), because age is just one factor that determines your premium. Other factors that impact premium (such as claims trends in Australian population) can result in a repricing of your insurance cover.

When insurers reprice stepped or level premiums, they don’t do it for an individual policy within a specific group unless they do it for every policy in that group.

To decide whether you’re better off on stepped or level premiums going forward, we recommend you speak to your financial adviser. They can help you understand your policy as well as any repricing activity that’s recently occurred, so you can make an informed decision.

A graphical example

Here is an illustration of stepped v level premiums, showing the difference between the two when you look at increases due to age. Other types of premium increases aren’t shown on this graph.

For illustrative purposes only. This graph illustrates age-based premium increases for stepped against level for all covers. This premium comparison has been calculated, assuming all other factors affecting the premiums are excluded.

Both stepped and level premiums can increase due to factors other than age.

Premium rates and premium factors are not guaranteed or fixed, and insurers have increased premium rates in the past and may increase in the future.

We recommend that you refer to the relevant product disclosure statement and policy documentation, and speak to your financial adviser, to understand other factors affecting your premiums.

Insurance policies can be bought in one of 3 ways:

1. Through a financial adviser

2. Direct from an insurance company, or

3. Held inside your superannuation, which is the case for most Australians

No matter where you purchase it from, the core idea is the same: if something happens to you that is covered in your policy - you get paid an amount to support you through the difficult changes.

Some important differences you need to be aware of:

1. Insurance through an adviser is flexible and tailored to you

When you buy a policy through a financial adviser you’re buying the policy as an individual.

This can enable the product to be tailored to your personal needs and circumstances through both the financial advice process (which includes a detailed needs analysis), as well as an insurance process called underwriting. Combined, this ensures the amount you pay and the cover you have is just right for you.

Another benefit of buying through an adviser is they can help you access insurance policies that you can pay for through your super.

2. Insurance bought directly from an insurance company has some limited flexibility

Buying insurance directly from an insurance company (generally online) has a degree of flexibility to respond to your needs.

This can be effective if you have a clear understanding of your financial position, and a relatively simple insurance needs.

Direct insurance can sometimes be more cost-effective than insurance through an adviser (not always), but is generally more expensive than Group Insurance.

3. Group Insurance through a super fund is standardised, which can sometimes be great for a basic level of cover

Superannuation funds buy standardised insurance policies in bulk from insurers, and then offer them to their members to ensure a level of protection for their financial future.

This means that it is often a cheaper way to access a standard level of cover, and if you fit the fund’s criteria you’re guaranteed to get cover – up to a certain limit – without the medical checks which are usually required when applying for insurance outside super.

Group Insurance through super can be a cost-effective and tax-effective way to fund your premiums and access basic levels of cover that can, in some cases, be easily upgraded. However, there are some important limitations to consider:

It’s a minimal level of cover

• The amount you’re covered for inside super may not be enough to provide the protection you need.

• You can often top up your level of cover inside super, but there are limits on how much insurance you can get without a medical assessment.

It may take longer for your claim to be paid

• When you claim on your insurance through super, the benefit is paid to the super fund first – in some cases slowing down the payment to you or your beneficiaries.

Income protection benefit payments may stop after two years

• Benefit payments on income protection claims outside super often pay you up to the age of 65

• Inside super, this benefit typically runs out after two years.

Not all cover types are available through super

• Insurance such as trauma cover for you or your children, or own occupation TPD are not available under superannuation. This could potentially leave a gap in situations where a critical illness or injury occurs and immediate financial relief is needed.

Your retirement balance can be impacted

• If you pay insurance premiums from your super contributions, that means there is a less money available to invest. Over a long period of time this could mean having less for retirement – especially when you consider the effect of compounding over time.

Your life insurance benefit payments might be taxed up to 32%

• Generally, life cover payments for an insurance policy outside super are tax-free, regardless of who receives it.

• In most circumstances, only dependants defined under the Superannuation Industry (Supervision) Act 1993 – which could be a spouse, a child under 18, or anyone shown to be financially dependent on the deceased – can receive the benefit tax-free.

• It’s important to note that, generally, if the lump sum benefit is paid to anyone else, including an adult or a non-dependent child, it will be taxed up to 32%.

There are 3 key reasons why your life insurance premiums go up from year to year. While you can't control all of them, you may be able to take steps to lower the cost of your cover.

Factors that you have control over

The cost of cover increases differently depending on whether you’ve chosen to pay stepped or level premiums (if your policy offers this choice).

Stepped Premiums

Stepped premiums are determined by your age at renewal, and can rise because:

• Life insurance premiums are predominantly based on the risk of certain events happening to you, and these risks increase with age as serious illnesses become more common as you get older. For stepped premiums, the cost of your cover is recalculated each year based on your age at your anniversary. Generally this means your premium will increase each year as you get older

• The optional indexation feature may be applied to your policy, which increases your sum insured to keep up with inflation

Level Premiums

Level premiums are determined by your age when you first take out cover, and can rise because:

• The optional indexation feature may be applied to your policy, which increases your sum insured to keep up with inflation

• The impact of insurance industry related factors and broader market factors, such as those shown below

Although you control the premium structure applied to your policy, you should note that at policy anniversary the premiums may still increase (even with level premiums), because age is just one factor that determines your premium. There are a number of other industry and broader economic factors that determine the price of premiums, such as claims trends in the Australian population. Sometimes, changes in these factors can result in a repricing of your insurance cover.

It’s important for you to know that when insurers reprice stepped or level premiums, they don’t do it for an individual policy within a specific group unless they do it for every policy in that group, so the decision to reprice is a big one.

Regardless of whether your policy is on stepped or level premium, premium rates and premium factors are not guaranteed or fixed and many life insurers in Australia have repriced premium rates in the past and may increase in the future, as a result of some of the industry and market factors discussed here.

It’s important to talk to your financial adviser or your life insurer to understand your policy as well as any repricing activity that’s recently occurred, so you can make an informed decision about which premium structure is right for you.

Indexation

• Indexation is an automatic increase to your sum insured to keep up with inflation, so you’ll always be able to have the same financial freedom in the event of a claim

• It’s optional – accepting indexation is great if your needs stay the same, but if your need for protection decreases over time, you may want to think about declining it

Where your policy lets you do this, you can elect to change your premium payment type (stepped or level), as well as switch off indexation – but we recommend speaking to your adviser, or us, before making a change.

Insurance industry factors

One of the jobs an insurer must manage is to ensure that the premiums collected are of a level to ensure claims can be paid. This means that the wider environment in which an insurer operates can determine the cost of your insurance.

Occasionally, we have to reprice our products to reflect industry risks and ensure sustainability of our products, so that we can keep people covered for the long term

For example, mental health based claims are rapidly increasing, placing pressure on income protection premiums:

• The World Health Organisation has identified mental illness as the biggest disease burden around the globe.

• The suffering caused by mental illness has a real and debilitating impact on peoples’ wellbeing. For us, it’s important that the people who need care are getting care and financial support to help them recover.

• The effect of this is that claims for mental health have increased in number as well as the length of time people are off work.

• To be able to provide cover and protection for all those who need it, we are required to price our policies in a sustainable way in order to keep people covered for the long term.

• Naturally we embrace our duty to support the wellbeing of our customers, to enable them to attain the care they need to get back to independence as quickly as possible.

Broader economic factors

Just like most business, insurers are also susceptible to wider economic factors that may have an impact on the premiums you pay. For example:

Low interest rates are having a particular impact on the cost of level premiums

• The Reserve Bank of Australia’s official cash rate has fallen dramatically over the last decade. It is currently sitting at a historical low of just 0.25% (as at July 2020).

• A low cash rate has a negative impact on life insurance companies, as premiums paid by customers are generally invested in cash or other interest rate-linked investments.

• This impact is more significant for policies with level premiums. This is because higher premiums are paid in the first few years of the policy, and those additional premiums are invested to help reduce the cost of the cover in later years.

So how can you reduce your premiums?

If you’re concerned about your premium, please talk to your financial adviser. They can work with you to see if it makes sense for you to:

• remove some extra-cost options you may have selected

• lower your amount insured

• switch off indexation (which increases your amount insured to protect against inflation) at your next policy anniversary

• extend your waiting period on your income protection policy (i.e. the time it takes for benefit payments to start after you stop working)

• reduce your benefit period on your income protection policy (i.e. the total amount of time you may be eligible to receive income protection benefits).

• explore the opportunity for tax deductions for your premiums. If you’re eligible, this can help to reduce the impact of premium increases.