Life Insurance Premium Increase Guide

These days it seems prices are rising everywhere, and it is. Your insurance premium is not exempt from increases. However, outrageous premium rises are starting to affect people seriously.

Is this normal? Should you expect to pay 10%, 20% even 50% more for your premiums in the future?

Our guide to life insurance premiums aim to remove uncertainty and provide you with clarity, while showing how you can potentially avoid these increases.

Why do life insurance premium increase?

Your premium rates can vary widely from insurer to insurer depending on the cover amount, your age, and the type of cover you’re applying for, as well as your smoking status and whether or not you have any pre-existing medical conditions.

Your premium rate is not guaranteed and may go up each year due to an increase in your age and due to sums insured rising because of indexation. Individual products can also be affected by a variety of factors, such as general claiming patterns, the state you live in and the premium structure you selected.

Calculating premiums is a delicate and often difficult job. Insurers need to establish a balance between the need of paying claims with the need to attain new customers while keeping their current customers happy.

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Why do premiums increase? The top 7 reasons for premium escalations.

A number of factors have impacted the Australian life insurance industry, including higher than expected claims rates, lower interest rates, advances in medical diagnoses and treatments. Before you commit to an insurer or when reviewing your existing life insurance policy, be aware of the top 7 reasons your premium price might increase.

number-1Does life insurance premiums increase with age?

Yes, life insurance premium increase with age. All other things being equal, an older person generally has a higher chance of dying than a younger person does. Therefore, age is a risk factor insurers have to take into consideration. In fact, age is the number one factor considered when calculating your life insurance premiums.

If you have a stepped premium structure, your premium amount will increase. The math is simple; every year you get older is a year you’re closer to your life expectancy, and thus you are a higher risk to the insurer.

number-2Increase in the base rate for entire product range/policy series

Insurance companies base their premium price on the risk they expect. The higher your risk, the higher your premium will be. For example, a 30-year-old male smoker with a family history of stroke will pay more for the same amount of cover than a 30-year-old non-smoking male.

However, you are not the only person the company is insuring. The base rate of a policy is based on the total pool of policyholders and can increase due to the economy and changes in the risk pool. You are essentially pooled together with other policyholders with similar attributes, however you can have different risk profiles.

Premium base rates are adjusted, according to the increase of risk of the policy pool, to safeguard the insurer against higher than expected claims. You may not like it, but that’s how insurance works.

number-3Increase in occupational base rates

Insurance companies are businesses. Thus the premiums charged must cover losses and expenses, and of course, also earn some profit.

When you apply for an Income Protection or a TPD policy, the insurer will review and classify your occupation into a specific category. This classification process is done to ensure higher risk occupations (like firefighters and law enforcement) do not affect the whole pool.

Thus, the duties performed in your occupation is a very important factor that affects the cost and structure of your insurance cover. It’s also important to be aware that different insurers may classify the same job differently.

Your premium price may also rise when your insurer applies increases to the occupational base rate, meaning it will cost you more to be insured for a specific occupation. This might be due to an increase of claims received from a specific occupational class, most likely because the insurer did not accurately identify the risks associated with that specific occupation set.

number-4Too aggressive/incorrect pricing to start with

Lack of early investigation at the beginning of an application can lead to the insurer charging higher premiums. To ensure they are sufficiently covered, some insurers might apply higher premiums from the very start of your policy without proper consideration of your individual risks factors.

number-5Higher than expected claims

Many life insurers increase premium rates due to the rising amount of claims they’re required to pay out. As a consequence, they hike up the premium price by as much as 20% to cover the claims cost.

When a company experiences a surge in claim frequency and severity, they will adjust their premium price upward, leading to you paying a higher premium for the same amount of cover.

We’re aware of one specific insurer that increased their premiums on a particular product by 43%.

number-6Legacy products generally have very high premiums

Some insurers sell policies that run for a very long time. People who have bought life policies in the 1980s and 1990s are seeing their premiums soar. These policies are called legacy products.

According to APRA, the Australian Prudential Regulations Authority, life insurance companies failed to manage their ever increasing number of legacy products efficiently. These old legacy systems, with their outdated medical definitions, has resulted in the products becoming more complex and costly, as well as not meeting the policyholders’ needs.

Attempting to transition legacy products to new policies has lead to expensive maintenance costs. The quality of the remaining policyholders in the legacy product pool deteriorates , while those policyholders who are healthy, switch to more affordable policies.

Other people remain with their existing insurance and legacy product (now closed to new customers) because they have existing medical conditions that prevent them from changing to a new product. This dramatically increases the percentage of the policyholders claiming on the policy, which inevitably causes insurers to increase premium prices regularly to cover the escalating costs.

number-7The premium type you have

Traditional stepped premiums generally start off cheaper, but increases every year, while your cover amount remains the same. Essentially, your premium gets re-calculated each year.

On the flip side, if you were to invest in level premiums, your costs will be higher at the start of your policy, due to it being determined by your age at the time of the application, but will be more affordable in the long run.

An alternative option is to combine the stepped and level premium style into a hybrid structure. This type of premium starts off as a stepped premium, and when it becomes more expensive than a level premium, it converts to a level premium structure.

number-8More variables contributing to your premiums increasing:

Changes in stamp duty

Stamp duty is based on the type of cover you have and the state you reside in.

Policy fees are increasing

While a select few Clearview & MLC have removed policy fees from the premium almost all others increase the policy fee portion by cpi each year – adding to your premium.

Frequency loadings

Some insurers argue that it takes a lot of admin to collect monthly premiums, but with the dramatic advancement in technology, we strongly disagree that such reasons for elevated cost still be justifiable.

How much do life insurance premiums increase?

The amount by which your premium increases is dependent on a variety factors, including your occupational class, your age and the claims statistics of the pool of policyholders in the product. However, your choice of premium structure may further influence the level of premium increase you can expect.

Are all types of cover premiums going up?

Good news! Our Life Insurance Direct Quote Index research revealed that on average, between 2015 & 2016, Retail policies experienced a decrease of 1.40%.

However, during this same period Direct policy’s increased by 0.62%. While the research was limited to life insurance only, it is promising to see very little changes in premiums.

However, the same cannot be said about income protection and Business Expenses (BE) premiums that are being cited as experiencing higher than expected claims rates.

Insurers who have recently increased their income protection rates include

AIA

AIA are making premium changes to their Income Protection and Business Expense policies. The average increase is 4% and will vary depending on your occupational class, waiting periods and benefit periods. Premium changes will be applied from your next policy anniversary date.

On the bright side, as of 10 December 2016, any new IP and BE policy will receive a 7.5% AIA Vitality Discount if you add Vitality to your policy. Enforce policies will have the discount automatically applied at their next premium date or policy anniversary.

CommInsure

CommInsure has sent out notifications to their clients that they will indeed increase rates for their Income Protection cover with 7.5%. The premium increase is said to take place on your policy anniversary, upon which you will receive a policy anniversary letter providing details of your new premium.

Clearview

In an attempt to simplify their premium rate structure, Clearview has removed the policy fee from all cover types. To offset this change, Clearview has increased the base rate of their premiums with about 1%.

Income Protection and Business Expenses policyholders can expect the following increases:

  • Waiting period rates for 14, 30, 365 and 720 days have increased by 10% to 15%.
  • Waiting period rates for 60 and 180 days have increased by 5% to 7.5%.
  • The discount on an Occupational Class AAA professional has increased with 2.5%.
  • AM Medical professional discount has decreased from 25% to 22.5%.

Conclusion

There are many factors taken into account when your life insurance premium is calculated, many of which are beyond your control.

To ensure you receive the best rates for the cover you’re needing, you should compare quotes and shop around.

If you’re thinking about taking out life insurance or would like to review how your current premium price stacks up to similar policies, then talk to one of our advisers or use our quote index and quickly find more affordable Life Insurance cover.

Published: February 10, 2017
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