Life insurance can come with a lot of jargon, which makes it seem complicated. However, once it’s all removed and put simply, it’s much easier to understand how it works, which is important when deciding what is right for you and your loved ones.
Along with other reasons, generally, life insurance premiums generally get more expensive the older you get because, as you age, you’re more susceptible to injury or illness, and are therefore riskier to insure. However, there are different ways you can structure your policy to potentially mitigate part of this.
We’ll go through how you could structure your policy and how this may impact your premiums over time.
How do life insurance premiums work?
Regardless of the premium structure or life insurer you go with, there are some things that are consistent across life insurance premiums in Australia. Namely, premiums are almost always risk-rated, meaning you’ll likely need to undergo a medical assessment during the underwriting process.
Factors like your health status, lifestyle and family medical history all influence your overall risk rating and therefore determine your premium rates.
Your premium costs will also depend on your sum insured, which is the amount you or your beneficiaries will be paid out should you claim on your life insurance. If your sum insured increases at some point, your premium may also rise based on the age you are at the time. You can voluntarily increase your sum insured, or it may rise automatically through CPI indexation.
Income protection insurance is very similar to term life insurance regarding how the premiums work. However, there could be some differences, so always refer to the relevant Product Disclosure Statement (PDS) for the exact details of your policy.
There are two ways you can structure your premiums when taking out life insurance: stepped or level. There are pros and cons for both premium structures and the right one for you will depend on your personal circumstances.
The older you get, the more likely you are to claim on your life insurance. A stepped premium option accounts for this increased risk by adjusting your yearly premium as you age.
Some people choose the stepped structure to save on the premiums they pay at the start of their policy, or if their need for insurance is more short term. However, you may want to speak with an expert to see if this makes sense.
|Lower premiums when you first get insured.|
A suitable option for those who may not require life insurance for a long term.
|Might be less cost-effective over the life of your policy.|
Can become expensive to maintain when you’re older, which is generally when you need it most.
With a level premium structure, the costs are spread more evenly over the life of your policy. Level premiums will generally be more expensive than stepped premiums in the earlier years, and cheaper in later years. The level premium you pay will depend on your age at the start of your policy. Many life insurance policies with level premiums will transition to a stepped premium structure after a set period (e.g. your policy anniversary after you turn 65).
For both premium types, your premiums could change if the sum insured changes. This could be due to a voluntary increase, indexation or because your insurer has changed their premium rates. A change in government charges (e.g. stamp duty) could also lead to a premium increase. When your sum insured increases, your premium for the increased portion of cover will be based on your age when the increase occurs.
|You could save money over the life of the policy.|
Ideal for anyone who wants long-term reassurance.
You can potentially budget your premiums better because they remain more consistent over the years.
|More expensive initially.|
You’ll likely end up on a stepped premium structure eventually, which could potentially erode the savings you made.
Regardless of the premium structure you choose, your premiums could increase for a variety of reasons up to the discretion of your insurer, including (but not limited to) a change in government legislation, operating costs or commercial viability.