Why premiums go up (and what you can do about it)

There are 3 key reasons why your life insurance premiums go up from year to year. While you can’t control all of them, you may be able to take steps to lower the cost of your cover.

Factors that you control

The cost of cover increases differently depending on whether you’ve chosen to pay stepped or level premiums (if your policy offers this choice).

Stepped premiums are determined by your age at renewal, and can rise because:

• Life insurance premiums are predominantly based on the risk of certain events happening to you, and these risks increase with age as serious illnesses become more common as you get older. For stepped premiums, the cost of your cover is recalculated each year based on your age at your anniversary. Generally this means your premium will increase each year as you get older
• The optional indexation feature may be applied to your policy, which increases your sum insured to keep up with inflation

Level premiums are determined by your age when you first take out cover, and can rise because:

• The optional indexation feature may be applied to your policy, which increases your sum insured to keep up with inflation
• The impact of insurance industry related factors and broader market factors, such as those shown below

Although you control the premium structure applied to your policy, you should note that at policy anniversary the premiums may still increase (even with level premiums), because age is just one factor that determines your premium. There are a number of other industry and broader economic factors that determine the price of premiums, such as claims trends in the Australian population. Sometimes, changes in these factors can result in a repricing of your insurance cover.

It’s important for you to know that 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, so the decision to reprice is a big one.

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 and may increase in the future, as a result of some of the industry and market factors discussed here.

It’s important to talk to your financial adviser or your life insurer to understand your policy as well as any repricing activity that’s recently occurred, so you can make an informed decision about which premium structure is right for you.

Indexation

• Indexation is an automatic increase to your sum insured to keep up with inflation, so you’ll always be able to have the same financial freedom in the event of a claim
• It’s optional – accepting indexation is great if your needs stay the same, but if your need for protection decreases over time, you may want to think about declining it

Where your policy lets you do this, you can elect to change your premium payment type (stepped or level), as well as switch off indexation – but we recommend speaking to your adviser, or us, before making a change.

Insurance industry factors

One of the jobs an insurer must manage is to ensure that the premiums collected are of a level to ensure claims can be paid. This means that the wider environment in which an insurer operates can determine the cost of your insurance.

Occasionally, we have to reprice our products to reflect industry risks and ensure sustainability of our products, so that we can keep people covered for the long term

For example, mental health based claims are rapidly increasing, placing pressure on income protection premiums

• The World Health Organisation has identified mental illness as the biggest disease burden around the globe.
• The suffering caused by mental illness has a real and debilitating impact on peoples’ wellbeing. For us, it’s important that the people who need care are getting care and financial support to help them recover.
• The effect of this is that claims for mental health have increased in number as well as the length of time people are off work.
• To be able to provide cover and protection for all those who need it, we are required to price our policies in a sustainable way in order to keep people covered for the long term.
• Naturally we embrace our duty to support the wellbeing of our customers, to enable them to attain the care they need to get back to independence as quickly as possible.

Broader economic factors

Just like most business, insurers are also susceptible to wider economic factors that may have an impact on the premiums you pay. For example:

Low interest rates are having a particular impact on the cost of level premiums

• The Reserve Bank of Australia’s official cash rate has fallen dramatically over the last decade. It is currently sitting at a historical low of just 1.0% (as at July 2019).
• A low cash rate has a negative impact on life insurance companies, as premiums paid by customers are generally invested in cash or other interest rate-linked investments.
• This impact is more significant for policies with level premiums. This is because higher premiums are paid in the first few years of the policy, and those additional premiums are invested to help reduce the cost of the cover in later years.

How can you reduce your premiums?

If you’re concerned about your premium, please talk to your financial adviser. They can work with you to see if it makes sense for you to:

• remove some extra-cost options you may have selected
• lower your amount insured
• switch off indexation (which increases your amount insured to protect against inflation) at your next policy anniversary
• extend your waiting period on your income protection policy (i.e. the time it takes for benefit payments to start after you stop working)
• reduce your benefit period on your income protection policy (i.e. the total amount of time you may be eligible to receive income protection benefits).
• explore the opportunity for tax deductions for your premiums. If you’re eligible, this can help to reduce the impact of premium increases

If this is a topic that you would like to discuss in more detail, please go to www.MasterYourMoneyNow.com.au/getstarted to book in your complimentary 30 minute strategy session.

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Disclaimer: This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Past performance does not guarantee future returns.