Life insurance premiums explained
So you’re thinking about taking out a life insurance policy. Congratulations! This is the first step to lasting peace of mind for you and for your family.
As you know, life insurance is less about cost than it is looking after the people you love most. However, we do appreciate that customers want (and deserve!) clear, accurate information about how much it costs to take out a policy.
To help you make this important decision and tap into the benefits and assurances life insurance provides, we’ve answered some frequently asked questions about life insurance premiums.
What are life insurance premiums?
Before we discuss life insurance premiums, let’s start with life insurance- what it is, how it works, and why it’s worth your time and money.
Did you know that life insurance isn’t only in case of untimely death? Rather, life insurance products are designed to support your beneficiaries when you are suddenly and no longer able to do so. Terminal illness, trauma, and permanent disability are just a few sample scenarios when you may be eligible to file a life insurance claim.
Once a claim is approved, the individual or individuals named on your policy will receive a payout, either as a lump sum or a series of payments over time. While this does not and cannot eliminate the stress and grief associated with injury, illness, and death, it can relieve your loved ones of the financial burden brought on by things like rehabilitation costs, funeral arrangements, mortgage repayments, childcare, and so on.
To provide this coverage, policyholders must pay insurance providers set fees. These fees are called life insurance premiums.
How are life insurance premiums calculated?
Each insurer will have a slightly different process for reviewing your application for insurance cover, a fact that makes shopping around all the more important. Your premium is typically calculated using a combination of information about you (your age and health, for example) and reports or statistics specific to your demographic to determine how likely you are to make a claim for coverage.
Put simply: the higher the probability of a claim, the higher the premium.
Consider two 35-year-old women: one with a clean bill of health, and another who smokes 20 cigarettes per day. The woman who smokes is likely to pay a higher life insurance premium due to the increased risk of associated illness.
Will my life insurance premium change over time?
Similar to claim probability, premiums tend to increase as you age. This is based on the expectation that you are more likely to file a life insurance claim at 60 than you would at, say, 25.
There are two main types of premiums to consider when deciding which policy to purchase:
Variable Age-stepped Premium (previously known as “Stepped Premiums”)
Choosing a Variable Age-stepped premium structure means that your premiums will be calculated based on your age each year and will generally increase each year on the policy anniversary. Variable age stepped premiums typically start off cheaper than variable premiums, however, increases are typically more significant as you get older.
Variable Premium (previously known as “Level Premiums”)
Choosing a Variable Premium structure means that the premium is based on your age when you commence your policy, with the insurer attempting to spread the cost of cover over a number of years. Variable premiums will generally be more expensive than variable age stepped premiums initially, however, may be lower at some point in the future depending on how long you hold the policy.
Most variable premiums will revert to a variable age stepped premium at your policy anniversary around the ages of 65 or 70, depending on the insurer.
Neither Variable Age Stepped or Variable premium structures are fixed and the cost of cover will increase overtime if the benefit amount increases, the insurer updates their premium rates, discounts no longer apply, or in response to government charges. Should your benefit amount increase e.g. due to inflation protection or upon your request to increase the benefit amount, the cost of cover will be priced based on your age at the date of increase. The increased benefit amount will generally be subject to a higher premium rate than the original cover.
To learn more about the different premium structures you can refer to the Council of Australian Life Insurers (CALI) Life insurance premium fact sheet. The options available vary between insurers, so it’s important to also read the product disclosure statement for details on each insurers offering.
How often do I pay my life insurance premium?
This one depends on the type of cover you choose. We always recommend taking a close, critical look at the insurer’s product disclosure statement. Typically, your life insurance premium is payable either monthly or annually.
To find out how much life cover you may need, and to learn more about what products are available, head to our life insurance calculatorand onwards to our quick and easy online comparison tool.
If you still have lingering questions about life insurance premiums, our Lifebroker insurance specialists are here to help. Give us a call today on 13 54 33.
This website offers General Advice only and does not consider your personal objectives, financial situation or needs. Before you purchase a product, it is important to read the relevant Product Disclosure Statements to consider if the product is appropriate for you.