Ever wondered what goes into determining your life insurance premiums? Find out how the cost of life insurance is calculated.
How much you pay for your life insurance depends on many risk factors including:
- Your health
- Smoking status
- Life style
- The amount insured
- How comprehensive the policy is
- Insurance brand
This is just the tip of the life insurance premiums iceberg. Keep reading to find out what goes into determining your life insurance premiums and find out ways that you can cut those costs.
As stated in the introduction, the cost of life insurance comes down to personal circumstance. But what are the typical life insurance rates for men and women? Below is table that breaks down the average monthly cost for men and women at different life stages and amount of cover.
|Age||Cover Amount||Male per month||Female per month|
How regularly pay your premiums can affect the total amount you'll pay over the year. Generally, less frequent repayments will bring lower charges. Premium payments can generally be made on a fortnightly, monthly, half-yearly or yearly basis. The table below shows the premium frequency discounts that are available through AIA.
|Payment frequency of premium||Frequency charge|
You may be required to pay a stamp duty charge on your policy. Stamp duty charges vary between 0% and 11% depending on the State and Territory you live.
Factors that influence your premium
There are two main considerations an insurer must take into account when determining the premium it is going to charge a specific individual. These are:
- The amount of cover you want and the type of insurance you are looking for.
- The risk the company has to carry in the event of your death.
It is an insurance underwriters job to determine the risk an applicant poses to an insurer.
Factors that influence life insurance premiums
- Brand and policy. Each insurer assesses risk and hence premiums differently.
- Age: Age is an important risk factor. The older the applicant, the higher the risk of a claim, so the higher the premium.
- Gender: Your gender has an influence on premiums payable. Men generally pay higher premiums compared to women due to the life-expectancy of men in Australia being lower than that of women.
- Smoking status: Whether or not you smoke plays a massive role in determining the amount of premium you will pay. Smokers can pay as much as double in premiums to that of non-smokers.
- Drinking habits: High-alcohol consumption can lead to an increase in premium payments if underwriters perceive indicators of heavy alcohol consumption has impacted the applicants health.
- Pre-existing medical conditions: Pre-existing medical conditions may be taken into account during the underwriting process.
All this information is calculated against national averages from which an estimate for life expectancy can be determined. The cost of that risk can then be calculated. For instance, if a number of people of a certain risk category were to die during the period they were covered, what is the amount the company would have to pay out? This cost is then factored in to the amount of premium that you will need to pay.
Below is a sample breakdown of life insurance policies by brand and policy.
Note: Based on a non-smoking female office worker. Quotes are for illustrative purposes only and do not take into account your personal situation.
While life insurance premiums are affected by things like your lifestyle and health which you can change, other important factors include your age and your gender.
Women pay less for their life insurance premiums:
- According to the Australian Bureau of Statistics, women have an average life expectancy of 82 years and men 78 years.
- Men are more prone to health issues such as heart disease, stroke, diabetes or prostate cancer.
- Women are more likely to seek medical help and advice sooner, increasing their chance of surviving any health issues.
- Women are believed to not engage in as many high-risk activities as men.
Trauma insurance premiums change with age:
- Premiums are higher for women in their 30’s, due to a higher risk of cancer at that age, in particular breast cancer.
- Premiums become higher for men in the 50’s due to a higher risk of cardiovascular problems such as heart attacks.
Income Protection and TPD costs less for men:
- Statistics show that women generally claim for a longer duration than men.
- Women have also claimed on a higher number of occasions than men.
As previously mentioned, your age is closely related to the health risk you carry. So, the older you are, the more likely that your health may deteriorate and higher probability for the event of a claim.
Don't be surprised to see your life insurance premiums increase significantly by the time you reach 45 years old, as they will continue to rise over the life of your policy. By the time you reach age 60, your life insurance premiums would be six times more than the rates you had at age 40 (Drury, 2010).
To minimise the impact of age and the cost of your life insurance policy overtime, consider the following tips:
- Level premium structure for long-term policies. If you are looking to secure a long-term protection from your life insurance cover, you may want to consider a level premium structure. Level premiums are fixed at the time of your application, so it won't change regardless of your age. Most life insurance policies are indexed to increase each year (around 5%) so the benefit payout can keep up with inflation. You can expect a small increase on an annual basis; however, the increase will be relatively less than stepped premiums.
- Review your level of cover on a yearly basis. Reviewing your policy every year is essential to ensure that you have sufficient cover to carry you through the years when your responsibilities are highest. When your mortgage is paid off, your children are no longer dependent on you and you are preparing for your retirement, there should be no reason why you can't reduce your level of cover. However, just remember to leave enough cover in place just in case of unforeseen circumstances.
- Switch to get cheaper life insurance premiums. Make you shop around to compare different life insurance policies available on the market for a chance to save on your premiums. When you apply for a new cover, you generally have to go through the underwriting process.
There is no doubt that smoking affects your life insurance premiums, because as a smoker you are exposed to a range of health issues, which in turn put you at a greater risk of dying at a younger age. When an insurer calculates your premiums, they do so by taking into account how long you are going to be paying your premiums for before you die, and before your beneficiaries makes a claim. This allows the insurer to balance the money they receive from you in premiums over the years, with the amount they have to pay out as a benefit when you die.
Smokers can expect to pay up to twice as much for their life insurance premiums as non-smokers. You will be considered a smoker if:
- You smoke regularly.
- If you are a social smoker.
- If you have quit smoking less than 12 months ago.
You will not be able to enjoy the lower premiums of a non-smoker until you have been a non smoker for at least 12 months. Even if you only have a cigarette every now and then, you can still be classed as a smoker. It is also important that you are honest about your smoking habits, no matter how regular or sporadic they are, because if your insurer finds that you have lied on your application, your policy can become void, and your family will receive no benefit payout when you die.
Consider the examples below showing typical premium quotes provided for a 35 year old male looking to take out $500,000 in life cover:
- Status: Non-Smoker
- Average Cost of Cover: $31 per month
- Status: Smoker
- Average Cost of Cover: $57.69 per month
If you are looking at taking out life insurance, income protection or trauma insurance policies, you can have your premium payments structured in two ways:stepped or level. Stepped premiums mean that your future premium payments will be recalculated as you get older. While you are young your premiums will be rather cheap but as you age they will become more expensive to reflect the increasing level of risk you present to the insurer. Level premium payment means the total payments you will be expected to pay over the term of the insurance cover have been averaged out. You might find yourself paying more at the beginning of a level premium policy compared to a stepped policy, but you’ll be paying less at the end than you would be doing with a stepped arrangement. Eventually the stepped premium payments if you choose this policy, will exceed the constant level premium payments.
An example of how stepped premiums increase with age:
|Cover||Age||Male (Non Smoker)||Female (Non Smoker)|
|Cover||Age||Male (Smoker)||Female (Smoker)|
Source: Money Magazine
Reasons to take care when choosing stepped of levelled premiums
- Neither stepped or level premiums are necessarily better than the other. Both provide different benefits to different types of applicants.
- The stepped premium option means you pay less today, and premium payments increases could match future increases in your income.
- Over the course of the policy you will end up paying more for your insurance if you choose stepped premiums over the level premiums.
There is a third option for premium structures is hybrid. Hybrid premiums combine the best of both premium types. Hybrid premiums start out a higher than stepped but lower the level premiums. The premiums increase until a point where the premiums become stay the same. At this point the premiums are higher than level but are lower than stepped and no longer subject to increase.
*Graph is a rough estimate and should not be used as an indicator for cover.
The value of your financial responsibilities are always changing. It is important to review your life insurance to account for these changes.
- Ensure you are not paying too much in coverage - You do not want to be paying more than you are required to for life insurance. You could instead be using the money to improve your standard of living now instead of putting it away for extra life insurance coverage that may not be essential.
- Ensure you have enough coverage in place - You do not want to be paying for life insurance just to find out that you don’t have the necessary cover in the event of your death, injury or illness.
In determining the right level of cover, you should consider the following factors and the monetary costs of each.
- Asset preservation - make sure your assets are debt free, mortgages can be repaid, loans can be funded and credit facilities are sustainable.
- Income preservation - ensure the sustainability of your living conditions by making sure your income will be replenished through your life insurance cover.
- Future expenditure needs (planned and unplanned) - the cost of living in the future could increase due to inflation, increased expenditures due to health and age, retirement expenses, education funding and travel.
Selection of benefit discounts
Some insurers offer discounts on benefits that have been purchased on a stepped premium basis for the first years of the policy. Below is an example from insurer AIA for how this may work.
|Year 1||6% premium discount|
|Year 2||3% premium discount|
|Year 3||0% premium discount|
These discounts will generally be applied when the policy is first taken out. You have the option to opt out of the discount though it cannot be applied at a later date.
Some insurers will provide premium discounts based on the size of the sum-insured that has been taken out. This discount will generally vary depending on the type of cover that is applied for. Below is an example of the premium discounts available on term life cover:
|Benefit insured||Discount applicable|
|Cover up to $249,000||0% discount applied|
|Cover from $250,000 to $499, 000||10%|
|$500,000 to $999,999||20%|
|$1,000,000 or greater||30%|
Discounts for multiple life insurance policies
Most insurers will provide discounts to applicants that take out multiple insurance plans and pay over a certain amount in premium payments each year. The discount provided will vary depending on the number of plans and will be applied to the premium excluding any stamp duty or policy fees that you are entitled to pay.
The insurer will generally take into consideration adjustments to the premiums that may occur from benefit indexation, voluntary increases by you and increases due to age. Policies do not have to commence at the same time for this discount to apply and will be actioned on the next policy anniversary. Below are the premium discounts available on AIA:
|Number of policies||Premium discount available|
|3 or more policies||10%|
Joint life insurance discount
When you apply for cover with your spouse/partner or other family member (may vary depending on the type of cover), you may be eligible for a discount on your premiums, generally around 5%.