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Why are my Insurance premiums going up?

We get a lot of clients asking us why their insurance premiums are going up, and what they can do about it. This mainly applies to income protection insurance. However other premiums including for life, total and permanent disablement and critical illness insurance are also increasing.

Life and income protection have had some major changes in the past few years, with the most recent forced upon them by APRA to help with sustainability.

Why are insurance premiums increasing?

There is a range of factors as to why insurance premiums are increasing. The main one is a significant increase in claims, and the length of time people are on claims such as income protection. APRA noticed that life insurance companies were making losses on income protection, which is why they had to step in to force some changes.

Insurance companies also rise due to normal age-based increases, inflation (CPI), and stamp duty increases. Even level premiums can still increase for inflation and other factors below.

Another factor is the low-interest rates. Insurers invest the premiums they receive to earn some income before they need the money to pay out a claim. With low-interest rates, and the fact that they generally invest very conservatively (e.g. cash & bonds), the money they are receiving from this is much lower.

Insurers employ actuaries to work out the probability of claims based on certain types of risks. Interest rates are factored into these models and they use the analysis to design and price the insurance policies. This, as well as the fact that insurance companies have had an unsustainable focus for discounting new policies (to attract new clients), meant that they were not pricing policies sustainably for the long term.

Insurance companies are also placing blame on COVID-19. I think this is a cop-out, they had significant issues well before this.

What can you do about it? – in general

  1. Get some advice. Some people don’t review their insurance cover often enough and their situation has changed. This means they are still paying for cover that may not be appropriate for their situation. Do you still have the same level of debts (loans) that you had when you took the cover out? Have your kids grown up and become less (hopefully) financially reliant on you? Has your investment asset position improved? All of these things may mean you may need to change your cover amounts or policy types.
  2. To reduce insurance premiums on all types of cover. An easy step would be to reduce the sums insured. This involves a level of self insurance.
  3. You can change from a comprehensive style policy to a more basic insurance policy. This means you will give up some of the extra benefits provided by different types of policies.
  4. Confirm your occupation. Some people do not update the insurer if they change occupations to a less risky job. For example a plumber to a office based manager would reduce your premium. Some clients even forget to tell insurers when they have stopped smoking.

Income protection insurance specifically

  1. Income protection changes mean that if you took out a policy before 1st October 2021. The policy is likely to have better definitions. You would need to seek advice before changing to a different policy.
  2. Income protection premiums can be reduced by increasing the waiting period. A change from 30 to 90 days can reduce premiums by about 30%.
  3. The income protection benefit period can be decreased to reduce premiums. Some polices pay until age 70; this can be reduced to 65 or even a 5 year benefit period.
  4. Switch from agreed value to indemnity for income protection. Your cover may be set for a specific amount even if your income reduces at time of claim. This is more expensive than indemnity which means the insurer uses your income at time of claim to calculate your maximum benefit. (It’s important to note if you change from agreed to indemnity, you will not be able to go back as it is not on offer anymore)

To conclude…

It is important to remember why you protected yourself and your family in the first place. It may have been to help pay the mortgage or other debts. To help you cover your income if you couldn’t work, pay medical costs, or education expenses. If these reasons no longer apply then it’s certainly time to review. If they do still apply then you should comfortable that the insurer will be there when you need them – claim time.

You cant change all the factors that contribute to the cost of your insurance. There are many elements you can control and ways to reduce premiums while staying protected.

As always best to seek advice – if you want to make an appointment please book here.

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