Life insurance protects what matters most, but pricing can be difficult to understand. One of the most common questions is why their premiums change over time, even when their cover stays the same.
In this article, we’ll explain how life insurance premiums are calculated, what influences them, and why insurers sometimes need to make changes to keep your cover sustainable.
The background: all about premiums
Why do insurers charge premiums?
Life insurance is built around risk. When you take out life insurance, your insurer agrees to take on some of the financial risk tied to your life, health and ability to work. If something happens and you’re unable to work or pass away, your insurer – not your loved ones – provides financial support to help cover expenses like bills, debts, or funeral costs.
Insurers charge premiums to achieve this. These payments go into a shared pool that pays claims and cover operating costs.
Why do premiums vary between people?
Insurers calculate each person’s risk level (how likely they are to claim) to determine how much they should pay for their selected amount of cover. Personal circumstances or specific attributes such as age, gender and health influence the cost of premiums.
For example, because smoking increases health risks, smokers are on average more likely to claim on their insurance. Because of that higher risk, smokers typically pay more for their cover than non-smokers.
Factors affecting premium prices
How your premium structure affects pricing over time
As you age, the likelihood of you needing to make a claim increases. Policies with a variable age-stepped premium structure (also known as stepped premiums) increase yearly to reflect the added risk of ageing. While they’re often cheaper early on, they become more expensive later in life.
Policies with a variable non-age-stepped premium structure (also known as level premiums) stay more consistent over time because they spread the cost over several years. Premiums do not increase each year due to age, but start higher. However, they can still change over time due to other factors like repricing or changes to your cover.
Adjustments for living costs
As living costs increase, your sum insured will have less purchasing power. To help offset these impacts of inflation, many policies include a feature that automatically adjusts your sum insured annually, by either a fixed percentage increase
or the Consumer Price Index (CPI). But each time your sum insured changes, your premium changes too.
Repricing and high claims volumes
Insurers regularly review premium rates to make sure they can continue supporting future claims and cover operating costs. This process is essential for keeping insurance sustainable into the future.
One key factor influencing price is the cost of future claims.
In recent years, there has been a significant rise in mental health- related claims across the life insurance industry. For example, mental health now accounts for 36% of total and permanent disability claims for Australians aged 30-40, with a 730% increase in these claims over the past decade*.
When claims volumes rise, insurers may adjust premiums across their customer base to maintain the long-term stability of the insurance pool and strength for future claims.
Worried about premiums?
Insurance can feel complex, but you don’t have to figure it out alone. If you’re concerned about the cost of your cover, ask me how we can keep your insurance affordable relevant, and aligned with your goals.
*KPMG - Australia’s Mental Health Check Up, December 2024 and ABC - Spike in mental health insurance claims sees more Australians leaving the workforce for good, December 2024