Personal risk insurance: how to survive and manage premium price hikes

If you’ve experienced a substantial increase in your personal risk insurance premiums year-on-year in recent times you are certainly not alone, with many reporting average increases in the region of 20% per year over the last few years.

With such significant premium rises, many policy holders are questioning the worthiness of holding personal risk policies, including life, TPD, income protection and trauma, and are turning away from this type of cover. However, if you and your family are still reliant on your income to maintain your current lifestyle, then appropriate risk protection strategies remain critical.

Why have premiums increased so much?

A number of insurers have reported that the increase in personal risk premiums is largely due to the rise in mental health and disability claims over the last few years, particularly stress related ones, which has significantly depleted the reserves of the insurance companies needed to fund future claims.

No longer are the ‘blue-collar’ workers in occupations deemed ‘hazardous’ driving the quantum of claims and consequent premium increases , but rather ‘white-collar’ office workers and professionals struggling to cope with stress and the related health effects of it.

Some put the trigger for the rise in mental health related claims down to the Global Financial Crisis (GFC) of 2008, others the increased awareness and acceptance of mental health issues across the general public.

How are premiums determined?

There are a number of factors that contribute to the cost of your premiums; factors that depend heavily on your lifestyle and your medical history. These include:

your gender
age
the quality of your health (if you are, or were, a smoker)
height & weight
family health history
hazardous hobbies/activities
occupation (dangerous job with higher mortality rate)

Stepped or level premiums?

Another major contributing factor to the cost of annual premiums is whether you opt for a stepped or level premium structure.

Stepped premiums are re-calculated each policy anniversary based on age and policy fee at that time. As premiums rise the older you get, this structure is usually recommended for those only requiring a short-term policy, i.e. those in the latter stages of life.

Level premiums typically stay consistent throughout the policy’s life (at the quoted level), only changing in the event of an increase or decrease in the sum insured, a change in optional benefits or premium rates. This means that although level premiums may start out higher than stepped premiums, over time they increase at a substantially lower proportionate rate. Typically, those who require a policy over a long period of time are recommended to choose a level premium structure.

But do you really need cover?

Unless you are financially independent, that is you are not reliant on your ability to work to support your family’s wants and needs, and you are not willing to give up your current lifestyle should you become incapacitated in some way, then yes some form of personal risk cover should be in place.

The level of cover you need should be determined by amongst other things, your level of debt (mortgages, personal loans, credit card debts), essential expenses (food, petrol, electricity/water, car maintenance and insurance) and any additional outgoings that would be required to maintain your current lifestyle (private education fees, private health insurance and holiday expenses).

What can you do about the increases?

As we move through life our goals and objectives change at a rapid rate and so with it our insurance needs. It is for this reason reviewing your policies on a regular basis (annually) should ensure that they do not go ‘out of date’ and you don’t end up paying for cover you don’t need, or simply paying too much for the cover.

Sitting down to review your policies can seem like a somewhat arduous and, for some, boring task, but it is an essential exercise to ensure your polices remain relevant to you and where you are in life.

Your risk protection strategies should also not be considered in isolation and should form part of your wider total wealth management strategy, that is, the essential financial areas of your life including taxation, superannuation and investment.

It is recommended you sit down with your Advisor at least once a year to review all insurance policies to consider their role in your wider financial plan. By doing so, your Adviser will be able to see what options are, and are not, required and, in many cases, may be able to reduce your premiums by appropriately reducing cover and changing options within your policy.

Case study

Rodney and Jeanette, 59 and 49 respectively, first came to see us wanting to review their overall retirement strategy to ensure they had enough to satisfy their post-work aspirations. As part of this process we looked carefully at their existing risk protection strategy and personal insurance policies.

Rodney and Jeanette’s policies were first implemented 7 years ago and had not been reviewed in that time. Combined, Rodney and Jeanette were paying just shy of $48,000 per year in premiums.

After working closely with Rodney and Jeanette to establish exactly what type of risk cover and insured sums were required, we recommended that they restructure their policies and in order to achieve the best outcome, change insurers as well. In doing so Rodney and Jeanette reduced their annual premium outlay by $18,000. It is important to note here that this saving was achieved by reducing the levels of cover of only three out of their six policies – all other premium savings were achieved through re-structuring to higher quality but better priced alternatives.

Key benefits/changes to Rodney and Jeanette’s new risk protection plan:

Moving Rodney’s term life cover ownership from under his name to his self managed superannuation fund (SMSF) saved over $1,000 in premiums annually.
Linking Rodney’s TPD and term life insurance policies saved thousands in premiums annually without having to reduce the insured sum.
Reducing the level of Jeanette’s TPD and trauma cover benefits to a more realistic and appropriate sum saved over $5,000 in premiums annually.
The new policy provider offered cover for blood borne diseases for medical professionals (as a built in feature of their policy whereas the old policy did not).
The new policy provider’s TPD definition allowed for up to 10 hours per week work without offsetting any income earned within the 10 hours. The old provider did not allow for any hours.
The new policy provider’s income protection definition offered a wider and more comprehensive range of benefits including stronger definition for conditions such as prostate cancer, blindness, motor neurone disease, muscular dystrophy, paralysis, severe burns and severe diabetes complications.

By taking the time to thoroughly review their risk protection plan, we were able to improve the quality of Rodney and Jeanette’s insurance policies, reduce their annual premiums by $18,000 (just over 37%) and ensure the appropriateness of their cover. With the process costing Rodney and Jeanette very little time and money relevant to the annual cost saving in premiums, the exercise was one well worth undertaking.

If you would like to discuss your existing personal risk policies, or look at taking out a new policy, please feel free to contact our office via email, advice@mgdwealth.com.au, or call us on (07) 3391 5055.

Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.

Andrew Albury