Why Do Life Insurance Premiums Increase Each Year?
- Rodel Claudio
- 2 days ago
- 3 min read
Updated: 13 hours ago
At Merlin, we often hear from Clients wondering why their life insurance premiums increase annually—even when nothing in their health or lifestyle has changed. It can feel frustrating, but these adjustments are part of how insurers keep cover sustainable and reliable for everyone.
Understanding the main reasons helps you stay in control. There are usually three key drivers of premiums: your policy structure and personal factors, broader claims trends (including health and wellness patterns), and economic conditions like the recent RBA moves. Knowing these empowers you to review your cover and potentially optimise costs without compromising protection.
Policy Design and Your Changing Profile
Premiums reflect the risk at each stage of life, with built-in mechanisms that adjust over time.
Age-Stepped Premiums
These recalculate annually based on your current age. Statistically, the likelihood of health events increases as we age, so premiums step up to match. This is standard across the industry and applied fairly to all in the same category.
Automatic Indexation
Most policies increase your sum insured each year (often linked to CPI or a set percentage) to keep pace with inflation and rising living costs. More cover means higher premiums—logical for maintaining real protection, but it contributes to the rise.
Variable (Level) Premiums
These provide more stability by using your entry age for calculations. They’re designed to feel flatter over time, but they can still adjust due to indexation or portfolio-wide repricing if claims or costs shift significantly.
Insurers review entire groups of policies periodically—not individuals—using collective data to ensure fairness and viability. Before switching types, reducing cover, or turning off indexation, speak with your adviser. Short-term savings can sometimes mean less protection when you need it most.
Rising Claims Trends – Including Wellness Factors
Insurers collect premiums to pay valid claims reliably over decades. When claims patterns change, pricing often follows to keep the system balanced.
A key trend we’re seeing: mental health claims are increasing in both number and duration, especially in income protection and related covers. This mirrors global patterns recognised by the World Health Organization, where mental illness ranks as a major health burden. In Australia, more people are accessing support—and staying on claim longer—which is positive for recovery but puts pressure on overall costs.
At Merlin, we believe tying wellness to financial protection is powerful. Healthier lifestyles (including mental wellbeing) can lower long-term risks and sometimes qualify for premium discounts or better rates. Supporting recovery while keeping cover affordable for all requires careful pricing adjustments. These aren’t about limiting help—they ensure promises can be kept for future generations.
Economic Pressures – Including the Latest RBA Rate Rise
Like any business, insurers face real-world cost changes, particularly around interest rates and inflation. This impacts variable (level-style) premiums most, as they often invest early premiums to help offset later costs.
When investment returns soften or inflation persists, adjustments help maintain balance. The Reserve Bank of Australia’s recent decision on 17 March 2026 to lift the cash rate by 25 basis points to 4.10% (the second consecutive increase) aims to keep inflation in check. While higher rates may eventually boost insurer investment yields, the current environment of elevated inflation and tighter policy adds upward pressure on costs across financial services—including life insurance.
These macroeconomic factors remind us why regular reviews matter: your cover should stay aligned with both your needs and the broader economy.
Steps to Keep Your Insurance Premiums Manageable
If increases are stretching your budget, don’t wait—reach out for a no-obligation review. Your Merlin adviser can explore practical options such as:
Removing optional benefits you no longer need
Adjusting your sum insured to better match current circumstances
Deactivating indexation (with awareness of future adequacy)
Extending waiting periods or shortening benefit periods on income protection
Checking for tax-deductible premiums to ease the effective cost
Wellness ties in here too: maintaining a healthy BMI, managing stress, or building positive habits can sometimes unlock discounts or prevent higher risk loadings down the track.
Your life insurance is about peace of mind—for you, your family, and your future wellbeing. A quick check ensures it remains appropriate, affordable, and effective.
Questions about your cover?
Contact the Merlin team today. We’re here to help you protect what matters most while living well.
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