Why Do Life Insurance Premiums Increase?
You open your annual insurance letter and notice your premium has gone up again.
It is one of the most common questions we hear from clients:
Why does my life insurance keep getting more expensive when my cover has not really changed?
For many life insurance policies, premium increases are a normal part of how the policy is structured. However, there can be several reasons behind an increase, and understanding them can help you decide whether your current cover is still appropriate for your circumstances.
Why Does Life Insurance Get More Expensive as You Get Older?
One of the main reasons life insurance premiums increase is age.
Many personal insurance policies in New Zealand use what is commonly called an age-rated or stepped premium structure.
With this type of policy, your premium is recalculated as you get older.
From an insurer’s perspective, the likelihood of someone experiencing serious illness, disability or death generally increases with age. This means the cost of providing insurance also tends to rise.
Fidelity Life explains that insurers use population data, industry claims information and their own claims experience when determining the likelihood of future claims and setting premiums.
So, while nothing may have changed in your everyday life, the insurer’s assessment of the risk associated with your age has.
What Is a Stepped Premium?
A stepped premium generally starts lower when you are younger and increases as you age.
For example, someone who takes out life insurance in their thirties may initially pay considerably less than someone taking out equivalent cover later in life.
However, the premium is not designed to stay at that original price forever.
As the insured person moves through different age bands, premiums generally increase.
This structure can make insurance more affordable initially, but the longer you hold the policy, the more noticeable the increases can become.
What Is a Level Premium?
Some insurers may also offer level premium structures for certain types of cover.
Rather than increasing each year because of age, a level premium is generally set for an agreed period.
The trade-off is that the premium may initially be higher than an equivalent stepped premium.
One simple way to think about it is:
- Stepped premiums: usually cheaper initially but generally rise as you age
- Level premiums: may cost more initially but are designed to remain more consistent for the specified period
Level premiums may still change for reasons other than age, depending on the policy terms and insurer, so “level” does not necessarily mean the premium can never change.
Which structure is more appropriate depends on your age, budget, how long you expect to hold the cover and your wider insurance strategy.
Inflation Can Also Increase Your Premium
Age is not the only reason your premium may rise.
Some insurance policies include an inflation adjustment, often linked to the Consumer Price Index (CPI).
The purpose of this is to help prevent the value of your insurance from being gradually eroded by inflation.
For example, $500,000 of life insurance today may not provide the same purchasing power 15 or 20 years from now.
If your policy automatically increases the amount you are insured for each year, your premium may also rise because you are purchasing additional cover.
This can be useful, but it is still worth reviewing whether the increases remain appropriate for your circumstances.
Insurers Can Review Their Premium Rates
Sometimes your premium can increase for reasons unrelated to your individual age.
Insurance companies periodically review the pricing of their products.
Changes may reflect factors such as:
- Claims experience
- Changes in healthcare costs
- Longer-term medical trends
- Reinsurance costs
- Economic conditions
- Updated actuarial assumptions
- Changes across the wider insured population
This means an insurer may adjust its base premium rates across certain policies or groups of customers.
If you receive notice of a larger-than-expected premium increase, it is worth finding out exactly what has changed rather than assuming the increase is entirely age-related.
Changes to Your Cover Can Affect What You Pay
Your premium is also influenced by the amount and type of insurance you have.
If your sum insured increases, your premium will generally increase too.
You may also be paying for multiple types of personal insurance, such as:
- Life Insurance
- Trauma or critical illness cover
- Total and Permanent Disability cover
- Income protection
- Medical insurance
Each type of cover has its own pricing structure.
This is why looking only at the total amount leaving your bank account each month does not always tell the whole story.
It is important to understand what you are actually paying for.
Does a Premium Increase Mean You Should Cancel Your Insurance?
Not necessarily.
A higher premium can be frustrating, particularly when household costs are already increasing.
But cancelling an existing policy without first reviewing your situation can have consequences.
If you later decide to apply for new insurance, the insurer will usually assess your health and circumstances at that time.
If your health has changed since your original policy was arranged, a new policy could potentially:
- Cost more
- Have exclusions
- Have special terms
- Provide less cover
- Or, depending on your circumstances, not be available at all
That is why changing or cancelling insurance should generally be considered carefully.
Rather than asking only:
“Can I find something cheaper?”
A better question is:
“Does the insurance I am paying for still give me the protection I need?”
Could You Reduce Your Insurance Premium?
Potentially.
As your life changes, you may no longer need exactly the same amount or structure of insurance you had when the policy was first arranged.
For example, perhaps:
- Your mortgage has reduced significantly
- Your children are becoming financially independent
- Your income has changed
- You have built up more savings
- Your business circumstances have changed
- You no longer need a particular benefit
- You have overlapping insurance policies
In those circumstances, an adviser may be able to review whether your existing cover could be restructured.
That could involve adjusting the amount of cover, changing certain benefits or reviewing the way your premiums are structured.
The goal should not simply be to reduce the premium.
It should be to make sure you are not paying for insurance you no longer need while still protecting the financial risks that matter.
Why Regular Life Insurance Reviews Matter
One of the best ways to manage insurance costs over time is to review your policies regularly.
You might have arranged your insurance when you:
- Purchased your first home
- Had young children
- Carried a much larger mortgage
- Earned a different income
- Owned a different business
- Had very little in savings
Ten years later, your financial situation may look completely different.
Your insurance should evolve with it.
You can read more in our guide on how often and why you should review your life insurance.
What Is a Stepped Premium?
A stepped premium generally starts lower when you are younger and increases as you age.
For example, someone who takes out life insurance in their thirties may initially pay considerably less than someone taking out equivalent cover later in life.
However, the premium is not designed to stay at that original price forever.
As the insured person moves through different age bands, premiums generally increase.
This structure can make insurance more affordable initially, but the longer you hold the policy, the more noticeable the increases can become.
Should You Switch to a Cheaper Insurance Provider?
Price is important, but it should not be the only factor used when comparing insurance.
Policies can differ in their:
- Definitions
- Additional benefits
- Exclusions
- Claims criteria
- Policy wording
- Premium structure
- Ability to adjust cover later
A cheaper premium does not automatically mean better value.
Our article on why your insurance may be more expensive than your friend’s explains why seemingly similar people can receive very different insurance pricing.
It is also worth understanding the benefits included within your existing cover before replacing it. You can read more about this in Does Your Life Insurance Cover Have Extra Benefits?.
What If Your Life Insurance Is Becoming Unaffordable?
If your premium is starting to put pressure on your household budget, do not assume your only options are to continue paying the full amount or cancel everything.
There may be ways to restructure your cover.
For example, you may be able to review:
- Your sum insured
- Optional benefits
- Premium structures
- Overlapping policies
- Inflation adjustments
- How different types of cover are prioritised
Halo Advisers can review existing term life, trauma, income protection and health insurance policies and help clients understand whether their current structure still suits their needs.
The Halo Advisers FAQ also notes that when circumstances change, cover can be reviewed and options such as adjusting benefits or restructuring a policy may help make premiums more manageable.
Before Making Changes, Understand What You Already Have
Insurance that you arranged years ago may contain benefits, terms or underwriting outcomes that would be difficult to replicate today.
Before replacing or cancelling anything, it is important to understand:
- What your current policy covers
- What you are paying for
- Why the premium has increased
- Whether your current level of cover is still necessary
- What you would gain or lose by changing policies
Life insurance should not necessarily remain unchanged forever, but changes should be made for a reason.
If your premiums have recently increased and you are unsure whether your current policy still makes sense, contact Halo Advisers for a review of your existing cover.
Sometimes the answer may be to make a change.
Other times, understanding why you have the cover and what it provides may show that keeping it is still the right option.