Why life insurance has become more expensive in recent years

If you've noticed your life insurance premiums have risen, you're not alone. In most cases, your life insurance premiums will increase and this happens for a variety of reasons.

Premium structure

Most life insurance policies in Australia have stepped premiums, meaning how much you pay increases each year by a certain percentage. For example, if you're with NobleOak, your stepped premiums will go up about 2% per year if you're under 30 and between 5% and 7% in the years following that.

Premiums rise as you get older for that simple reason, you're not as young as you were when you took out cover. The older you are, the more risk you pose to the insurer and the more you'll pay for cover each year.

Stepped vs level premiums

Stepped premiums

If you want your premiums to reflect the changing risk you'll pose to your insurer, you can choose stepped premiums. This type of premium structure is the most common form of premiums in Australia. When you first take out a life insurance policy, stepped is the cheaper option but becomes more expensive than level premiums over time.

Level premiums

If you want to avoid increasing costs each year, you can choose level rather than stepped premiums. Level policies work in the inverse of stepped, meaning they're more expensive in the beginning but wind up being cheaper than stepped over time. While level premiums ideally stay the same, they may still increase with CPI depending on your policy. This feature can be turned off.

Other factors affecting the cost of life insurance

While the above are all normal reasons that you might have seen your premiums go up, there are other factors that can influence how much you're paying for life insurance and one of the biggest is your insurer's ability to turn a profit.

Increase in mental health claims

Insurers are businesses and in order for them to remain profitable, they need to be paying out fewer dollars for claims than they are taking in premiums for their customers. Obviously, right? But in recent years there has been a major upswing in the number of claims life insurers are paying out, especially income protection claims for mental health issues.

According to a study conducted by Rice Warner, which analysed claims from 16 large super funds from 2010 to 2013, mental/stress claims were the number 1 claim type for middle-aged Australians.

Government reforms

In 2018, the government proposed some reforms as part of its "Protecting your Super" bill. Basically, those earning under a certain amount or under the age of 25 would need to opt in to insurance provided by super funds. Losing all these young and healthy members could have a massive impact on the risk pool for everyone with group insurance, with some analysts predicting up to a 26% increase in insurance premiums.

The premiums themselves

Life insurance is caught in a catch-22 of sorts: the price of life insurance goes up, which forces people to drop their policies, which forces the price of insurance up again, which forces more people to drop their policies and so on. In fact, an estimated one-third of life insurance policies are cancelled after just one month, according to news.com.au.

Research conducted by Rice Warner showed that over a 4-year period, life and TPD premiums increased by 215% and income protection premiums went up by 82%. However, overall life and income retail policies lost $1.5 billion over 4 years, according to APRA.

How can you keep your costs down?

A lot of what affects your premiums is out of your control, but there are some steps you can take to keep your costs down.

• Review your needs as you get older. While many people look at life insurance as a set-and-forget product, it's important to reassess your needs as you get older. Say you've paid down your mortgage and you no longer have kids in school, those are two pretty big expenses off your plate, which means you won't need as much coverage.
• Opting out of inflation increases. As mentioned earlier, you can opt out of automatic inflation increases for your premiums. The downside is your benefit won't be worth as much by tomorrow's dollar. However, the upside could be twofold: your premiums will be lower and you might not need to review your level of cover later in life.
• Don't double dip on insurance. If you have a standalone life insurance policy, make sure you're not also paying for one (or more) through your super fund.

Opting out of super: How much you could save (and invest)

Having life insurance through both standalone and super not only means you're paying twice for the same thing, but it also means you're eating into your retirement savings. We analysed how much extra balance you could get at the end of 20 years if you were to opt out of super cover.

• Assumptions

  The actual balance you end up with could vary based on a few factors. In our analysis we assumed the following:

  • The policyholder started "default cover" at the age of 25.
  • Their salary started at $50,000 and increased by 7.2% each year.
  • They contributed 9.5% of their salary to super each year.
  • The yearly cost of insurance was based on default cover for each fund between the ages of 25 and 45.
  • The super returns for each fund were based on SelectingSuper's list and we assumed the interest rate was accrued annually. The actual return you get each year may vary.

  This was the calculation we used to get the difference each year:

  Calculation

  Difference in yearly balance = [balance at start of year x average annual return rate over 20 years] – [(balance at start of year – cost of insurance for that year) x average annual return rate over 20 years]

  We then added this up over 20 years.

• See yearly wage growth and super contribution

  Salary at age (7.2% growth per year)	Yearly contribution before investment (9.5%) – principal
  $50,000	$4,750
  $53,600	$5,092
  $57,459	$5,459
  $61,596	$5,852
  $66,031	$6,273
  $70,785	$6,725
  $75,882	$7,209
  $81,345	$7,728
  $87,202	$8,284
  $93,481	$8,881
  $100,212	$9,520
  $107,427	$10,206
  $115,162	$10,940
  $123,453	$11,728
  $132,342	$12,572
  $141,870	$13,478
  $152,085	$14,448
  $163,035	$15,488
  $174,774	$16,604
  $187,357	$17,799
  $200,847	$19,080

This calculation is a general indicator of how much more you could earn by opting out of super insurance cover. This analysis was completed in February 2019. Your balance may be impacted by the actual return your super fund achieves that year, how often a super fund accrues interest on your investment and the cost of your actual insurance cover based on your personal situation.

Bottom line

Your life insurance premiums are going to go up whether you like it or not, which is why it helps to compare your options and speak with an adviser, as they will be able to walk you through how and why your premiums will change so you won't be caught unaware.

Sources:

• Click to expand

  • https://www.nobleoak.com.au/wp-content/uploads/2018/09/Managing-The-Ongoing-Costs-Of-Your-Cover_September2018-2.pdf
  • https://www.news.com.au/national/your-money-or-your-life-australians-in-insurance-exodus-over-premium-price-rises/news-story/e32f5d3e558e01440802c946db308241
  • https://home.kpmg/au/en/home/insights/2018/06/insurance-in-superannuation-impact-2018-federal-budget.html
  • https://www.moneymanagement.com.au/news/superannuation/industry-identifies-glitches-govt%E2%80%99s-super-legislation
  • https://www.tal.com.au/insurance-products/retail-things-you-need-to-know
  • https://www.afr.com/news/policy/budget/federal-budget-2018-life-insurance-premiums-to-rise-30pc-under-opt-in-20180509-h0ztv3
  • https://www.moneysmart.gov.au/insurance/life-insurance
  • https://www.ricewarner.com/rice-warners-affordability-study-how-affordable-is-group-insurance-in-superannuation/
  • https://www.ricewarner.com/superannuation-fees-how-low-can-we-go/
  • https://www.ricewarner.com/breathing-life-back-into-disability-insurance/
  • https://www.ricewarner.com/wp-content/uploads/2018/07/Rice-Warner-Federal-Budget-Impact-on-Insurance.pdf