Key Takeaways
- Your age, health and lifestyle are the biggest influences on your life insurance premiums.
- Premiums will go up every year if go with a stepped-premium structure.
- Smoking and dangerous jobs can seriously increase your life insurance costs.
The truth about life insurance premiums in Australia
Life insurance can give you lots of peace of mind, but knowing exactly what you’re paying for – and why – can be confusing. You might look at your premiums and wonder how they even came up with that number. While it might feel like a bit of a mystery, working out life insurance premiums in Australia is surprisingly well-structured.
Insurers take a look at your risk profile, factor in the type of cover you’re after and then apply actuarial modelling to figure out how much you’ll pay. And although some factors will be outside of your control, others can be adjusted to better suit your needs – and budget.
Still a bit unsure? Here’s exactly how life insurance premiums work here in Australia, so you can make the best decision for yourself and your loved ones.
What is a life insurance premium?
A life insurance premium is the amount you pay to keep your policy active. Depending on your insurer, you’ll be able to pay them monthly, quarterly or annually. In return, your insurer promises to pay a lump sum to your beneficiaries if you pass away – or if you’re diagnosed with a terminal illness, depending on the policy.
Your premium isn’t a random figure. It’s calculated based on a mixture of personal factors and features in the policy. The goal for insurers is to match the price of the policy with the risk you represent, and with the potential benefit payout.
What factors influence life insurance premiums in Australia?
Premiums are all about risk. If an insurer sees you as being statistically more likely to make a claim, then you’ll usually pay more. Here are the things that are assessed during the application process:
1. Age and gender
The older you are, the more likely it is that a health condition or accident could trigger a claim. That’s why your premiums are lower if you take out cover while you’re young and in good health.
Gender can also play a role. On average, women live longer than men, so female applicants of the same age and health profile could pay slightly less than their male counterparts.
2. Smoker or non-smoker?
Smoking ramps up your risk of a wide range of illnesses (e.g. cancer, heart disease, respiratory conditions). For that reason, insurers tend to charge smokers almost double the premiums of non-smokers. If you’ve quit smoking, you could be eligible for non-smoker rates after 12 months.
3. Personal health and medical history
Your overall health and medical background are looked over to determine your risk of early death or serious illness. This includes chronic conditions like high blood pressure or diabetes, past surgeries, as well as any recent medical issues. Some insurers will need a report from your GP or medical tests to get a clearer picture of your health.
If you have pre-existing conditions, you can usually still get cover. However, your premiums will likely be higher and you’ll have to wait at least 12 months before you’re able to make a claim.
4. Family medical history
Insurers will also look into your family’s medical history. If any of your close relatives had hereditary illnesses (e.g. cancer, heart disease, diabetes) – especially if diagnosed at a young age – then that could impact your premiums.
5. Occupation and lifestyle
Your job matters too. Australians who work in high-risk occupations like construction, aviation, mining and emergency services can be stuck with higher premiums because of the higher chance of injury or death.
By the same token, people who regularly engage in high-risk activities (like skydiving and motorsports) can be slapped with additional loadings or exclusions.
6. Weight and BMI
Your body mass index (BMI) is used as a general measure of your health risk. A BMI that falls outside the normal range will usually result in higher premiums, as it’s linked to lots of different chronic health conditions.
Types of cover and premiums
Life insurance can refer to a number of different products, and the type of cover you choose will determine how much you’ll end up paying.
- Life cover (death cover): Pays a lump sum if you pass away or are diagnosed with a terminal illness.
- TPD (total and permanent disability) insurance: Provides a benefit if you’re permanently unable to work.
- Trauma insurance (critical illness): Gives you a payout if you’re diagnosed with a specific serious condition.
- Income protection: Replaces part of your income if illness or injury stops you from being able to work.
Each of these products has a different risk profile and frequency of claims, which means the premiums aren’t the same across the board. Income protection, for example, is generally more expensive than life cover because claims are more common and ongoing.
The higher the benefit amount you choose, the more you’ll pay. Say you have a $1 million life cover policy – your premiums will obviously be higher than a $250,000 one, all other things being equal.
Stepped vs Level premiums
When choosing a policy, you’ll likely have the option between stepped and level premiums.
- Stepped premiums start lower and go up every year as you age. They can be more affordable early on but will grow quickly over time.
- Level premiums, on the other hand, are more expensive at the outset, but they don’t increase due to your age. Over time, they might be the more cost-effective option if you keep your policy for the long haul.
Lots of Australians are drawn to the initial affordability of stepped premiums, but level premiums can give you a bit more stability and predictability – especially if you plan to hold your policy for decades.
How insurers calculate your premiums behind the scenes
Insurers rely on large sets of data like mortality rates, morbidity rates (for TPD and trauma) and historical claims to assess risk levels and set their premiums.
Their models also take into account business costs like underwriting, marketing, customer service, administration and more. Reinsurance agreements – the policies insurers take out for their own protection – also play a part in how pricing is set.
Once all your personal and policy details are reviewed, the insurer uses this modelling to figure out your specific premiums. In some cases, loadings (extra charges) and exclusions can apply.
What you can do to reduce your premiums
Firstly, if you’re a smoker, quitting can make a huge difference. Not only will it improve your overall health, but it could also cut your premiums once you’ve been tobacco-free for at least a full year.
Applying while you’re young and healthy can also lock in cheaper premiums – especially if you choose a level premium structure. It’s also wise to keep your cover up to date. If your financial responsibilities change over time, you might not need as much cover, and that could keep your premiums low.
Finally, having a healthy and active lifestyle by exercising regularly and eating well can make you a more attractive customer to insurers. While lifestyle changes won’t always translate to immediate discounts, they could help you avoid health issues that will raise your premiums later on in life.
Life insurance through super – what’s different?
Millions of Australians have life insurance through their superannuation fund. It’s an easy and affordable option, especially for people who might not qualify for separate cover.
Group life cover through super is usually opt-out and doesn’t require any detailed underwriting unless you want to increase your cover above the default level. Because of this, it can be cheaper – but it won’t suit everyone:
- Limited benefit amounts.
- Exclusions for pre-existing conditions.
- No (or very little) cover for high-risk occupations and pastimes (e.g. dangerous hobbies).
Reviewing your policy as life changes
Your life insurance policy shouldn’t be set-and-forget. As your life changes, so should your cover. Major life events – like buying a home, starting a family, changing jobs or retiring – can change how much cover you need, or even whether you still need it at all.
So make sure you’re reviewing your policy every so often to check that it’s still fit for purpose. You might reduce your premiums by decreasing your sum insured or switching premium structures. On the other hand, a life change could prompt you to increase your cover to protect your family more fully.
If you’re unsure, our team of experts can help you understand your options and make the best choice.
We can help you compare policies, understand how your premiums are set and make sure you’re only paying for the cover that makes sense for you and your family.
FAQ's
Loading is an extra amount added to your premiums based on a higher risk factor (e.g. a health condition or job).
Yes, but you might need to reapply or take out a new policy with different terms.
Most life insurance policies include cover for suicide, but only after an initial exclusion period of 13 months.
If you miss a payment, your policy could lapse after a grace period. In this case, you might lose cover and need to reapply.
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