Selecting the appropriate life insurance premium structure is an essential aspect of financial planning. In 2025, you typically have two choices: Variable Age-Stepped Premiums and Variable Premiums. Each option comes with its own advantages and disadvantages, so comprehending their workings will enable you to make a well-informed decision that aligns with your needs and budget.
Changes to life insurance premium labels
Following industry-wide reforms, the Council of Australian Life Insurers (CALI), together with the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), has revised how insurers describe their premium structures. These updates are designed to enhance your understanding of potential changes in your premiums over time, promoting transparency and predictability in policy costs. By the close of 2024, all insurers will have implemented these new labels, simplifying the process of comparing life insurance options with clarity.
Why Premium Structures Are Changing
As part of these reforms, insurers have introduced clearer terminology to help you understand your coverage and anticipate future cost changes. By 31 December 2024, these new premium labels were fully implemented across Australia, providing you with greater clarity and confidence in your life insurance decisions.
Life insurance is a long-term financial commitment, and understanding your premium structure clearly allows for more effective budgeting. These changes also aim to address consumer concerns about unexpected price increases, ensuring policyholders can make informed decisions that align with their financial situation and coverage needs.
Although the change in label did not alter how premiums are priced, it serves as a reminder that premiums can change regardless of the structure you choose.
What Are Variable Age-Stepped and Variable Premiums?
Variable Age-Stepped Premiums (Previously known as Stepped Premiums) are linked to your age at each policy renewal. As you age, your insurance risk rises, leading to higher premiums. Changes in coverage amounts, inflation, insurer rate adjustments, and medical advancements can also affect your payments.
Variable Premiums (Previously Known as Level Premiums). Variable Premiums typically do not rise solely because of aging. Instead, they are influenced by inflation adjustments, policy modifications, and changes in the insurer’s base rates. These premiums are determined based on the age at which you initially applied for the policy, securing that initial entry age for the original coverage amount. Although this entry age remains constant, your premiums may increase due to higher coverage from CPI increases, or changes in base rates, policy, or stamp duty.
This approach helps maintain long-term affordability by preventing increases directly linked to age.
How Are Variable Age-Stepped Premiums Determined?
- Premiums are recalculated annually based on your current age, insured amount, base rates (overall risk factors), policy fees, and any changes in stamp duty.
- Age: As you age, the risk increases (insurers use mortality or morbidity rates for your age group).
- CPI Increases to Your Coverage: If your policy includes a Consumer Price Index (CPI) increase linked to inflation, this can raise your premiums as you are insured for a higher amount.
- Base Rate Adjustments: Premiums might also change due to underwriting adjustments based on policy or industry-wide claims data, policy fee changes, or stamp duty modifications.
Pros & Cons of Variable Age-Stepped Premiums
Pros:
- Usually more affordable initially, appealing for short-term needs.
- Offers more flexibility to change insurers or adjust coverage.
- Suitable for temporary coverage needs (e.g., mortgage protection, short-term financial obligations).
Cons:
- Costs may become unaffordable later in life when coverage is most needed.
- Premiums increase annually, potentially becoming very expensive over time.
- Not cost-effective if you plan to maintain the policy for over 15 years.
How Are Variable Premiums Determined?
- Entry Age: Premiums are based on your age at the time of application, locking in that age for the initial coverage amount.
- CPI Increases to Your Coverage: If your policy includes a CPI increase linked to inflation, premiums may rise as you are insured for a higher amount.
- Base Rate Adjustments: Premiums can be influenced by underwriting changes based on policy or industry-wide claims data.
- Policy or Stamp Duty Adjustments: Changes in policy fees or stamp duty can also affect your premium over time.
- Long-Term Affordability: This structure helps manage costs by avoiding age-related premium increases.
Pros & Cons of Variable Premiums
Pros:
- More predictable and better for long-term budgeting.
- If you keep your policy for over 15-20 years, you’ll generally spend less than with Variable Age-Stepped Premiums, though not always.
- Offers greater long-term financial security.
- Reduces the impact of aging on the initial coverage level, keeping premiums steadier compared to Variable Age-Stepped Premiums.
Cons:
- Higher initial costs compared to Variable Age-Stepped Premiums.
- May not be ideal for short-term coverage needs.
- Switching to another insurer may not be financially beneficial, as it resets the entry age with the new provider.
When Does a Variable Premium Transition to a Stepped Premium?
Variable premiums are not fixed permanently. Usually, around the age of 65 or 70 (depending on the insurer and policy details), the premium structure changes from a variable premium to a stepped premium. This change means that instead of your premium being determined by your entry age with adjustments for inflation or policy modifications, it will now be recalculated yearly based on your current age. As insurance risk increases with age, this transition can result in significant premium hikes.
Understanding the timing and process of this change is vital for effective long-term financial planning. Reviewing your policy terms early can help you anticipate potential cost increases and consider options such as adjusting your coverage or switching to a different premium structure before the change occurs.
Choosing Between Variable Age-Stepped and Variable Premiums
Selecting the best premium structure for your needs depends on your financial objectives, the duration you plan to maintain your policy, and your willingness to pay in the long run. If you require short-term affordability and flexibility, Variable Age-Stepped Premiums might be more suitable. However, if you seek stability and long-term cost savings, Variable Premiums could be a better choice.
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Author Profile: Jeffrey Liu, JP, is the founder and principal adviser of Hippo Insurance (aka: Hippo Wealth), with a deep expertise in wealth protection. His extensive experience includes roles in the wealth management divisions of Westpac, ANZ, and a local multi-family office. As the host of “Riches Talk,” a podcast dedicated to cultivating personal and business growth, Jeffrey has established himself as a thought leader in developing life riches. His insights have been featured on SBS, The Australian, and Channel 7. Notably, he was a semi-finalist on Australia’s Got Talent in 2010. Learn more at http://www.hippoinsurance.com.au
