Ever wondered how insurers work out the cost of your life insurance?

There are many factors that can impact the premium you pay, but there are 4 factors in particular you need to be aware of.

1. Your personal risks

• Dangerous occupations can attract a higher base rate for your insurance, even before any loadings are applied.

• Poor health (such as a high Body Mass Index, or BMI) as well as dangerous hobbies, may add what’s called a ‘premium loading’ to your cover – which means you pay a higher premium than someone who doesn’t have those risk factors.  Any loadings like these are recorded on your Policy Schedule

• In terms of your health and lifestyle, the core factors that can contribute to your risk, and therefore a potential premium loading or higher set of rates, include:

  • Smoking – past and current smoking behaviour

  • Medical history – any conditions you currently suffer from, or have previously suffered from, or hereditary factors that increase your risk of claim

  • Occupation – the danger posed by your job on your physical wellbeing

  • Hobbies – the danger posed by any high risk personal activities.

If your health improves or your lifestyle has changed recently, get in touch with your adviser to review your policy and determine if these loadings can be removed to help lower your premium

2. Your age and gender

• Life insurance premiums are predominantly based on the risk of certain events happening to you.  These risks increase with age as serious illnesses become more common as you get older

• Age-related risks can also differ for men and women, which is why premiums for men and women of the same age may be different. For example, women live longer than men on average, which is why in most cases life cover premiums are cheaper for women. 

3. The more protection you have, the higher the cost of your cover

Your cost is influenced by these important factors of your policy:

• The type of benefits that are payable on your policy (trauma, disability, death)

• The sums insured of those benefits

• How long you would receive those benefits for (i.e. your benefit period for income protection)

• The waiting period you’ve selected before your benefits are paid out (for income protection)

• Any optional extras you may have selected

4. Whether you’ve chosen to pay stepped or level premiums

For most policies, two premium structures are offered:

• A stepped premium is one where the cost of your cover is recalculated each year based on your age at each policy anniversary. Generally this means your premium will increase each year as you get older.

• A level premium is one 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.

• 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.

• Regardless of whether stepped or level premium is selected, 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.

A number of other factors may influence your premium, including:

1. Where you live, because different state governments levy stamp duty differently.

2. The structure of your cover, such as whether you select to have your insurance as a ‘stand-alone’ product, or whether you have it linked.

3. The number of lives covered, you may be eligible for a group discount on your premium if your policy covers family or business partners.

4. The frequency you want to pay your premium, where paying your premium monthly can attract a loading which wouldn’t apply if you pay your premium annually.

5. Whether you’ve selected indexation, as a way of pegging your cover against cost of living increases.

Whether you’ve chosen any extra cost options for your policy, including things like accidental death covers, child covers and others.

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%.