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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.
BSc. Econ, BCom, MBus
Authorised Representatives of Millennium Three Pty Ltd
ABN 61 094 529 987
AFSL 244252
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.
Level premiums:
If your insurance has a level premium it generally means the price stays the same. However, it may feature an optional indexation. This means your sum may go up to keep up with inflation.
The impact of insurance industry related factors and broader market factors, can also cause your premium to increase.
Bottom line: 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. Economic factors, industry changes and claim trends can all affect your premium.
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.
What you can do about it
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 indexation.
Insurers must guarantee claims can be paid and their clients are taken care of in case something goes wrong. In order to do this, it’s essential to consider the wider environment, which occasionally leads to repricing products. Similar to any other business, they need to ensure sustainability of their products, so they can keep people covered for the long term.
When this affects you
When we hear about low interest rates, it immediately sounds great on the surface. However, they can cause premium rates to increase – especially now.
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 because they invest in cash and/or other interest rate-linked investments. Why do they do this? They prefer low-risk investments and often take a conservative long-term approach with investing. So, if they aren’t getting a strong return on their investment because rates are so low, they need a solution to stay in business and ensure they can pay for their clients’ insurance claims in the long run.
Bottom line: Market changes can affect their business, and it’s important for everyone for them to stay in business.
If you’re concerned about your premium, please feel free to talk to us. We 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 (e.g. the time it takes for benefit payments to start after you stop working).
reduce your benefit period on your income protection policy (e.g. 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.
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Perspective Wealth Management Pty Ltd
ACN 639 529 749
Trading as Luck Financial Group is a corporate authorised representative of Millennium3 Financial Services Pty Ltd
ABN 61 094 529 987 – AFSL 244 252
The information displayed on this communication is a summary only and should not be construed as investment advice or securities recommendations. It is prepared for general information and not having regard to any particular persons investment objectives, financial situation or needs. No recommendation (express or implied) or other information should be acted on without obtaining professional advice. You are encouraged to consult a financial planner before making any decision as to how appropriate this information is to your objectives, financial situation and needs. Also, before making a decision, you should consider the relevant Product Disclosure Statement available from your financial planner. This website is for Australian residents only.
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