How do Life Insurance Premiums Work?

Ever wondered what factors influence your life insurance premiums?

There are many factors that an insurer will consider when determining how much you'll pay for your life insurance policy. Your insurer will evaluate the level of risk you pose to them and calculate your premiums accordingly. Typically, how you pay depends on:

  1. Your risk factors
  2. The policy itself

This includes:

  • Age. One of the main factors that determine the life insurance premium is your age. Generally, the younger a you are, the lower your premiums will be. The rationale simple: the younger you are, the less likely you are to make a claim, so the less money you'll pay.
  • Your occupation The nature of your job job has a huge impact on your life insurance premiums. For instance, if you work in an office and sit at a desk all day long, your risk of death at your job is quite limited, which means your insurance premium will be low. However, if you are in a high risk profession such as a builder or pilot then your insurance premiums will be higher.
  • Individual lifestyle. Your lifestyle is another factor that determines your life insurance premium. If you are a chain smoker, or if you drink practically every day, then you will be considered as a high risk individual and your insurance premium will be higher than someone who is a teetotaler or does not smoke.
  • Pre-existing conditions. If you have any pre-existing medical conditions such as high blood pressure, diabetes, or a family history of heart problems, then again you will be deemed as a high risk individual and the insurance company will charge you higher insurance premiums than healthier individuals.

These factors in your policy will affect your premiums

  • The amount insured
  • How comprehensive the policy is
  • Insurance brand

Receive a quote from these direct companies

Name Product Maximum cover Maximum Entry Age Minimum Sum Insured Guaranteed Future Insurability Expiry Age Short Description
$1,000,000
64
$100,000
No
No expiry age as long as premiums are paid
Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™.
$1,500,000
65
$3,000
No
80
Protect what matters with a new Virgin Life Insurance policy. If eligible, you can earn 25,000 Velocity Points. Ends 02 September 2019. Min $80/month, min. 6 month policy to earn Points.
$2,000,000
74
$100,000
Yes
99
Join Qantas Life Insurance and earn up to 100,000 Qantas points. T&CS apply including minimum premium and policy hold periods apply to earn points.
$1,000,000
60
$100,000
Yes
99
Get life cover up to $1 million.
$1,500,000
65
$100,000
Yes
No expiry age as long as premiums are paid
Get life cover up to $1.5 million. Plus, Medibank health insurance members can save 10% off premiums.
$15,000,000
69
$50,000
Yes
99
Get a quote for up to $15 million in life insurance cover. Plus, get two months free when you combine life insurance with another type of cover. T’s and C’s apply. Ends 29 August 2019.
$1,500,000
65
$100,000
Yes
No expiry age as long as premiums are paid
Get life cover up to $1.5 million. Plus, ahm health members can save 10% off premiums.
$1,500,000
69
$50,000
Yes
99
Receive a 10% discount on the second person when two applications are submitted at the same time, and both policies are issued.
$1,000,000
65
$100,000
No
80
Receive one month's premiums off every year if you pay annually upfront. T’s and C’s apply.
$1,500,000
64
$100,000
No
No expiry age as long as premiums are paid
Cover up to $1.5 million with Guardian Life Insurance.

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How much does life insurance cost in Australia?

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.

AgeCover AmountMale per monthFemale per month
30$250,000$21.00$18
30500,000$30.00$25
40$250,000$24.00$20
40$500,000$37.00$30
50$250,000$56.00$43
50$500,000$94.00$70

Life insurance premium frequency charge

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 premiumFrequency charge
Yearly0%
Half Yearly5%
Monthly8%

Life insurance stamp duty 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.

Why is having a healthy lifestyle important for you and your life insurance?

Your lifestyle choices can and will have an impact on how much you'll pay for life insurance. Keep reading to find out more about how you can reduce the amount of risk you pose to an insurer.

Lifestyle choices that can affect your health and life insurance rates

Some of the lifestyle choices that can have a significant impact by driving up the cost of your health and life insurance premiumsinclude:

  • Your weight. If you're considered overweight or obese, you're at risk of a number of serious health issues that are related to weight such as heart attack and stroke. This means you become a greater risk to insurance firms.
  • Smoking. If you're smoker, you're at risk of a number of health related problems as well as being exposed to a possibility of premature death. This makes you a higher risk to insurance firms and as a result, you will be paying higher premiums for life insurance.
  • Heavy drinking. If you drink alcohol on a regular basis and easily exceed moderate levels, you put yourself at risk of alcohol related health issues, such as liver problems, which could result in life insurance providers to view you as high risk individual. Heavy drinking can therefore result in the cost of your life insurance premiums being higher.

How are my premiums calculated?

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:

  1. The amount of cover you want and the type of insurance you are looking for.
  2. 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.


How do life insurance premiums vary with brand?

Below is a sample breakdown of life insurance policies by brand and policy.

AgeAIABTTAL
35$24.14$25.33$24.12
40$28.37$31.20$28.80
45$40.21$44.65$40.89
50$67.29$72.26$68.46

Note: Based on a non-smoking female office worker. Quotes are for illustrative purposes only and do not take into account your personal situation.


Does my gender affect my premiums?

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.

How much does my age impact my premiums?

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.

What impact does smoking have on how much I pay?

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

Stepped or level premiums: What is the best for me?

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:

CoverAgeMale (Non Smoker)Female (Non Smoker)
$100,00030$121$97
35$131$105
40$151$124
45$206$165
CoverAgeMale (Smoker)Female (Smoker)
$100,00030$364$242
35$391$283
40$510$376
45$785$580

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.

What are hybrid 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.


How often should I review my cover?

The value of your financial responsibilities are always changing. It is important to review your life insurance to account for these changes.

  1. 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.
  2. 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.

How can I pay less for cover?

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.

YearDiscount applicable
Year 16% premium discount
Year 23% premium discount
Year 30% 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.

Sum-insured discount

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 insuredDiscount applicable
Cover up to $249,0000% discount applied
Cover from $250,000 to $499, 00010%
$500,000 to $999,99920%
$1,000,000 or greater30%

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 policiesPremium discount available
3 or more policies10%
2 policies5%
1 policyNil

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%.

How do I decrease premiums in my life insurance policy?

There are a number of steps that can be taken to decrease your level of cover.

  1. Contact your insurer. You can contact your insurance provider and request a decrease in your sum insured which will then be reflected in your ongoing premium payments. Your provider can also assist you in updating your policy beneficiaries.
  2. Consolidate super in life cover. There may be some default life cover already stored in a number of super funds that have been opened by different employers and has accumulated over time. Consolidating these into one can potentially save you in premium and fee payments.
  3. Compare new policies. If you would like to cancel your existing policy and find a new policy altogether, it is important to take all of the necessary steps to ensure you are not leaving yourself unprotected and that you are receiving a competitive deal. An insurance consultant can assist you through this process by comparing hundreds of different policy options for you and explaining the different features and benefits available.
  4. Premium structure. There are several ways you can reduce the cost of your life insurance premiums. One way is to choose the premium structure that is best suited to your needs:
    • Stepped premiums start low and become more expensive as you get older, particularly after the age of 50, so they may be more suitable when you are young and starting out in life and wish to save money on your life insurance. Level premiums are calculated on your age at the time of application and they remain the same for the entire life of the policy. While they do cost more than stepped premiums, they may be suitable for those who wish to save money on their premiums later in life when they may have less disposable income.
    • Hybrid premiums are in between stepped and level premiums. They cost more than stepped premiums but less than level premiums at the outset of a policy, and they increase until you reach a pre-determined age, at which time they will not increase any. Hybrid premiums might suit someone who is prepared to pay a little more to save money over the long term.
    • Increase waiting period. Another way to save money on your premiums is to increase the waiting period. A waiting period is the time you wait after making a claim before that claim will be honoured. The more you increase the waiting period, the cheaper your premium becomes. However, the thing to watch with this is that you don't cause yourself or your loved ones financial hardship as a result. Unless you have access to other funds when you become ill or injured, you will not be able to pay your medical and hospital bills until your waiting period is over. And if your loved ones receive no benefit for too long a period after you die, they may not be able to pay the mortgage and continue to put food on the table.
    • Shorter benefit period. A third way to save on your life insurance premiums would be to select a shorter period over which the benefit would be paid. This is relevant when your life insurance policy includes income protection or TPD cover. A shorter benefit period would mean a cheaper premium because it translates into less money that the insurer would have to pay you. Again though, it is important to calculate whether the time length opted for would be enough to recover from an illness or injury and whether you would have sufficient funds coming in to allow you to live without hardship.
    • Remove CPI increases. Yet another way to reduce the cost of your premiums would be to do away with the option of Consumer Price Index (CPI) increases. This is an optional means of inflation-proofing your policy, where the cost of your premium and the amount of benefit paid are raised every year by the Indexation Factor or by 3-5%, depending on the policy. You can choose to opt-out of this inflation protection feature to save money on your premiums, but you need to be aware of the consequences. While your premiums wouldn't rise with inflation, neither would your benefit amount and after a few years, what you would receive in the way of a lump sum payout or income stream would be worth much less due to the march of inflation.
    • Compare quotes. As when buying any form of insurance, or anything at all for that matter, it is important to shop around. And while wading through dozens of different life insurance policies is not something most people enjoy, it will pay dividends if you are looking to save money on your premiums. It's very important to make sure you compare apples with apples. Using an online comparison site is the best way to compare life insurance quotes, as all the hard work has been done for you by the website and all you have to do is read the fine print.
    • Remove unnecessary cover. Just as you can choose only the cover you think you will need, so you can choose to remove those options you are fairly certain you won't need to reduce the cost of your overall premium. Weigh each option carefully however, as what may seem irrelevant to your situation now may become more important in the future. Again, professional advice from your insurer or adviser would be wise when making such decisions.

    Is there anything I need to watch out for when I decrease my life insurance?

    Any desire to reduce your life cover for any of the reasons listed above should be met with careful consideration of where you may be leaving yourself exposed. Here are some important considerations to take before reducing the level of life cover.

    • Underinsurance. As you get older your life insurance needs change so it's important to reassess your policy following life-changing events such as buying a home, getting married or having kids. If you take a set and forget mindset with life insurance, you could find that what your policy covers does not suit your changing needs.
    • Changes in health. Many people consider dropping the Trauma feature from their life cover to save on premiums. In doing this you may risk leaving yourself exposed to new conditions that have surfaced since your previous medical underwriting. Even though policyholders may not require further medical underwriting, it is worth having one so to recognise any new conditions that have developed.
    • Policy indexation. All life policies are indexed for changes in inflation. Reducing the sum insured can place your policy at risk of not keeping up with inflation.

    Reasons to decrease life insurance premiums

    There are a number of key factors that may influence someone to try to reduce their level of cover and save on their life insurance premiums. These can include;

    • Reduction of financial obligations. A reduction in what actually needs to be covered in the event of your death is a key reason to reduce your level of cover. You may have paid off your mortgage, credit card debt or personal loan. Similarly your children may have left home and become financially dependent and not require the same level of cover as previous years.
    • Update of policy beneficiaries. People may want to update/reduce the number of beneficiaries in their policy for a number of reasons. Divorce, death, increase in financial independence may lead you to remove beneficiaries from your cover.
    • Changing needs and policy options. Your current policy may feature additional benefits that are no longer relevant to your situation i.e. Child Cover, Business Safeguard and Premium Holiday. Removal of these may lead to start looking for a less comprehensive policy.

    Some common questions we get about life insurance premiums

    Receive a quote for life insurance

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