Life insurance is designed to provide financial security for your family, but many Australians are left puzzled when they see how much their premiums cost. The calculation isn’t random—it’s a structured process based on your individual risk profile, lifestyle choices, and the level of cover you select.
Understanding how premiums are set can help you make smarter decisions about your policy and even find ways to keep costs under control.
What Is a Premium?
A premium is the regular payment you make to keep your life insurance policy active. Depending on the terms, you might pay monthly, quarterly, or annually. In exchange, your insurer agrees to provide a lump-sum payment (or ongoing benefits, depending on the policy type) if you pass away, suffer a serious illness, or can’t work due to disability.
The amount you’re charged is linked to both personal risk factors and the type of insurance you hold. The higher the perceived risk, the higher the premium.
Key Factors That Influence Premiums
- Age and Gender
Your age is one of the most significant factors. The older you are when you take out a policy, the more expensive it becomes. Women often pay slightly less than men because, statistically, they live longer. - Smoking Habits
Smokers are considered high risk due to the strong link between tobacco use and serious health conditions. Premiums for smokers can be nearly double those of non-smokers. If you quit and remain smoke-free for at least 12 months, most insurers will reassess you at the lower rate. - Medical History and Current Health
Pre-existing conditions such as diabetes, heart disease, or high blood pressure can raise your premiums. Insurers also take into account past surgeries and overall wellbeing. Sometimes, medical reports or additional health checks are required during the application process. - Family Medical Background
Hereditary health conditions within your immediate family—like cancer or cardiovascular disease—can influence what you pay, especially if relatives were diagnosed at a young age. - Occupation and Lifestyle
Certain jobs, such as mining, aviation, and emergency services, carry higher risks and generally lead to higher premiums. Similarly, participation in extreme sports or dangerous hobbies can either increase costs or lead to exclusions in your cover. - Weight and Body Mass Index (BMI)
BMI is often used as a general health indicator. Being outside the recommended range can increase premiums because of the associated risk of long-term health issues.
Types of Cover and Their Impact on Cost
Life insurance is an umbrella term that includes several products:
- Life Cover (Death Cover): Pays a lump sum to your beneficiaries if you pass away or are diagnosed with a terminal illness.
- Total and Permanent Disability (TPD): Provides financial support if you’re permanently unable to work.
- Trauma Insurance: Covers you for specific critical conditions such as cancer, heart attack, or stroke.
- Income Protection: Replaces part of your income if you’re unable to work due to illness or injury.
The cost varies depending on the type of cover. Income protection, for example, is often more expensive because claims are more frequent and ongoing compared to standard life cover.
Premium Structures: Stepped vs Level
When you apply, you’ll usually need to choose between two premium structures:
- Stepped premiums: Start cheaper but rise each year as you get older.
- Level premiums: Higher at the beginning but more stable in the long run, making them better suited for long-term cover.
How Insurers Work Out the Numbers
Behind the scenes, insurers use complex models that draw on statistics like life expectancy, claims data, and illness rates. They also factor in operating costs and reinsurance expenses. The final figure is a balance between your risk and the insurer’s need to stay profitable.
Reducing Your Premiums
While you can’t control every factor, there are ways to manage costs:
- Quit smoking and maintain a healthy lifestyle.
- Apply while you’re younger to lock in lower rates.
- Regularly review your cover—if your financial situation changes, you might not need as much protection.
- Consider level premiums if you plan to hold your policy for decades.
Insurance Through Superannuation
Many Australians have life cover bundled into their superannuation. This can be a cost-effective option since premiums are often lower and deducted directly from your super account. However, cover through super may have lower benefit limits, exclusions for risky jobs, and reduced flexibility.
Final Thoughts
Life insurance premiums in Australia aren’t arbitrary—they’re based on a mix of your personal circumstances, health risks, and the type of protection you want. By understanding what goes into the calculation, you can make informed choices and potentially save money while ensuring your loved ones are financially secure.
