Understanding Insurance Loyalty Tax: Why Long-Term Policyholders Pay More

Insurance loyalty tax is the premium differential that develops when long-term policyholders pay significantly more than new customers for equivalent coverage from the same insurer. This additional cost—which can add 10-50% or more to annual premiums—accumulates because insurers price new business competitively whilst increasing premiums for existing customers who face medical underwriting barriers to switching. For Australian families holding policies for 7+ years, loyalty tax often represents $1,000-3,000+ in annual overcharges¹.

Christopher Hall, AFSL 526688 authorised representative with over 20 years insurance industry experience, has reviewed more than 500 Australian policies and consistently identifies loyalty tax as the primary driver of premium increases beyond normal age-related adjustments. Recent industry data shows individual disability income insurance premiums increased 15% over just two years to December 2022², with much of this growth concentrated amongst long-term policyholders rather than new customers.

This article explains what insurance loyalty tax is, when it begins affecting premiums, why insurers charge long-term customers more, and what Australian families can do about it.

What Is Insurance Loyalty Tax and How Does It Work?

Insurance loyalty tax refers to the systematic premium increases applied to long-term policyholders that exceed what age, inflation, and claims experience would justify. It manifests as the gap between what existing customers pay versus what new customers purchasing identical coverage would pay.

In Christopher Hall's experience reviewing Australian policies, loyalty tax follows a predictable timeline. Most insurers apply minimal loyalty tax during years 0-2 of policy ownership. Between years 2-4, modest repricing begins—typically 2-5% annually beyond expected increases. After year 4, loyalty tax becomes consistent across insurers, with most policies experiencing it by year 7. For standard policies still actively sold, loyalty tax stabilises at approximately 10% of annual premiums. Legacy policies discontinued by insurers can carry loyalty tax exceeding 50%.

The percentage-based nature means dollar impact grows as policyholders age. A 30-year-old might pay an extra $50-100 annually from loyalty tax, whilst a 55-year-old with equivalent percentage loyalty tax could pay $1,000-2,000 additional per year. Industry analysis shows Australian life insurance direct premiums reached $18.6 billion in the year to June 2023³, with premium growth driven primarily by increases to existing policies rather than new business volume.

Why Do Long-Term Policyholders Pay More Than New Customers?

The commercial driver behind insurance loyalty tax centres on medical underwriting and claims risk assessment. When policyholders maintain coverage for many years without switching insurers, it frequently indicates they may not easily pass medical underwriting requirements for new policies. This creates adverse selection—customers remaining in long-term policies statistically represent higher claims risk than those who can switch.

From an actuarial perspective, if a policyholder cannot pass current medical underwriting standards, they present elevated claims probability compared to someone who can. KPMG industry data shows gross claims as a proportion of gross premiums increased by 2.9 percentage points (from 61.7% to 64.6%) for risk products in the year to June 2023⁴, reflecting rising claims costs insurers must fund through premium revenue.

Healthy Australians who can complete medical underwriting successfully maintain the option to switch insurers for more competitive rates. This mobility creates pricing pressure for new business, as insurers compete to attract lower-risk customers. However, switching requires substantial effort, typically involves advice fees, and carries risk of facing exclusions or premium loadings if any health changes occurred since original policy establishment.

Christopher Hall notes this creates a two-tier market structure: competitive pricing for new customers passing current underwriting standards, and higher pricing for existing customers whose continued ownership may signal elevated claims risk. Whilst frustrating for loyal policyholders, this reflects the risk-based pricing model fundamental to insurance economics.

When Does Insurance Loyalty Tax Start Affecting Premiums?

The timeline for loyalty tax varies by insurer, but Christopher Hall's reviews of hundreds of Australian policies reveal consistent patterns across the market.

Years 0-2: Premium increases typically reflect only age-related risk changes and inflation adjustments. Loyalty tax is generally absent during this period.

Years 2-4: Some insurers introduce modest loyalty tax. These adjustments—often 2-5% annually beyond expected increases—can be difficult to distinguish from normal premium growth.

Years 4-7: Loyalty tax becomes more universal. By year 4, most insurers have introduced repricing for long-term policies. Annual increases of 8-12% may occur where age and inflation justify only 5-7%.

Years 7-11: Loyalty tax reaches full effect. For actively sold policies, loyalty tax typically stabilises near 10% of annual premiums. Discontinued legacy policies may carry 20-30%+ loyalty tax.

Years 11+: Long-term policies, particularly pre-2021 products, may carry loyalty tax exceeding 50% compared to equivalent new coverage, though this must be weighed against valuable policy features potentially unavailable in current products.

Recent data supports this timeline. Individual disability income insurance premiums increased 15% over two years to December 2022¹, significantly outpacing inflation and age-related expectations for most policyholders in this category.

How Can Australian Families Identify If They're Paying Loyalty Tax?

Several indicators suggest life insurance premiums include significant loyalty tax components:

Policy age exceeding five years: Policies held more than five years without professional review likely contain loyalty tax. Christopher Hall's analysis consistently reveals repricing in this category.

Annual increases exceeding 10-12%: Whilst premiums naturally increase with age, consistent annual increases above 10-12% for policyholders under 55 often signal loyalty tax. Age-related increases become steeper after 55, making loyalty tax harder to identify without professional benchmarking.

Policy established before 2021: Policies issued before April 2021 APRA insurance reforms may carry substantial loyalty tax, as many insurers discontinued these structures and subsequently repriced them significantly. However, pre-2021 policies may contain valuable features unavailable in current products⁵.

Premium increases despite no claims: Families who've never claimed might assume premiums should remain relatively stable. However, loyalty tax applies regardless of individual claims history, based on portfolio-level risk rather than personal experience.

What Options Exist for Addressing Insurance Loyalty Tax?

Australian families paying loyalty tax have several approaches, each with trade-offs requiring careful assessment.

Professional policy review by AFSL-licensed advisers can quantify loyalty tax precisely through market benchmarking whilst accounting for policy features, medical history, and underwriting implications. Christopher Hall's comprehensive reviews identify whether loyalty tax justifies change or whether valuable policy features make higher premiums worthwhile.

Market comparison with underwriting consideration reveals potential savings, but only for Australians passing current medical underwriting. Health conditions developed since original policy establishment may result in exclusions or premium loadings making switching disadvantageous despite loyalty tax.

Policy modifications can reduce premiums through various alterations. TAL affordability data shows potential reductions: benefit period changes up to 45%, waiting period adjustments up to 6%, switching from agreed value to indemnity income protection up to 15%, or declining indexation up to 3%⁶. These modifications reduce coverage, requiring assessment of whether savings justify reduced protection.

Maintaining policies with valuable features: For pre-2021 policies, loyalty tax may be offset by grandfather clauses preserving agreed value income protection, own occupation TPD definitions, or unrestricted mental health coverage unavailable in current products. Christopher Hall finds many families benefit from maintaining these legacy policies despite higher premiums.

The optimal approach depends on individual circumstances, health status, policy features, and loyalty tax magnitude.

Book Your Complimentary Insurance Review

Australian families experiencing annual premium increases exceeding 10% for policies held 5+ years may benefit from professional review to identify whether loyalty tax is present and assess available options.

Arrow Equities provides complimentary, no-obligation initial consultations to help families understand their policy costs and coverage. Speak directly with Christopher Hall's insurance specialist advisory team (AFSL 526688) to discuss current premiums, policy features, and whether loyalty tax justifies making changes.

Book Your Free Review

Initial consultations include:

• Assessment of whether loyalty tax affects premiums

• Benchmarking of current costs against market rates

• Identification of valuable policy features worth preserving

• Discussion of options with no pressure to proceed

Phone, video call, and in-person consultations available across Australia.

Related Insurance Premium Review Resources

Understanding insurance loyalty tax forms part of comprehensive policy assessment. Families paying significant loyalty tax should evaluate whether pre-2021 features provide value exceeding premium differences Pre-2021 Insurance Policy Features Worth Keeping. For those considering switching to eliminate loyalty tax, understanding medical disclosure requirements is essential, as new applications require full underwriting that may result in exclusions offsetting cheaper premiums Medical Disclosure Mistakes.

Professional assessment includes feature comparison between existing and potential new policies, premium benchmarking, and evaluation of whether loyalty tax justifies the time and cost involved in making changes Professional Review Process.

Frequently Asked Questions About Insurance Loyalty Tax

What is insurance loyalty tax?

Insurance loyalty tax is the additional premium long-term policyholders pay compared to new customers for equivalent coverage. It develops because insurers price new business competitively whilst increasing premiums for existing customers who may face medical underwriting barriers to switching.

When does loyalty tax start affecting my premiums?

Most insurers begin applying modest loyalty tax after 2-4 years of policy ownership. By year 7, loyalty tax is typically in full effect, adding approximately 10% to annual premiums for standard policies and potentially 50%+ for discontinued legacy policies.

How much does insurance loyalty tax cost?

Loyalty tax impact varies by policy age, type, and insurer. Standard policies may carry 10% loyalty tax, whilst legacy products can exceed 50%. For a 55-year-old paying $4,000 annually, 10% loyalty tax represents $400 per year, whilst 50% represents $2,000 annually.

Can I avoid loyalty tax by switching insurers?

Switching insurers can eliminate loyalty tax if policyholders can pass current medical underwriting. However, any health conditions developed since original policy establishment may result in exclusions or premium loadings with new insurers, potentially offsetting loyalty tax savings.

Should I cancel my policy to avoid loyalty tax?

Cancelling policies solely due to loyalty tax requires careful consideration. Pre-2021 policies may contain valuable features unavailable in current products that justify higher premiums. Professional review helps determine whether loyalty tax exceeds the value of policy features worth preserving.

Why do insurers charge loyal customers more?

Insurers apply loyalty tax because long-term policyholders who cannot easily switch due to health changes represent higher statistical claims risk than new customers who must pass current underwriting. This reflects risk-based pricing fundamental to insurance economics.

Is insurance loyalty tax legal in Australia?

Yes. Insurers may price policies based on risk assessment, which includes evaluating whether policyholders can pass current underwriting standards. Whilst frustrating for loyal customers, this practice aligns with actuarial principles governing insurance pricing.

Conclusion

Insurance loyalty tax represents a significant but often unrecognised cost for Australian families maintaining life insurance policies for 5+ years. Beginning modestly after 2-4 years, loyalty tax can reach 10% of annual premiums for standard policies and exceed 50% for legacy products, with percentage impact compounding annually.

The commercial driver is straightforward: long-term policyholders unable to pass medical underwriting represent higher claims risk, and insurers price accordingly. Industry data showing gross claims rising from 61.7% to 64.6% of premiums⁴ reflects the actuarial reality underlying loyalty tax.

For families experiencing consistent annual premium increases exceeding 10-12%, professional review can quantify loyalty tax and assess whether switching, renegotiating, or modifying coverage provides better value. However, analysis must account for valuable policy features, particularly in pre-2021 policies, that may justify higher premiums despite loyalty tax.

Professional insurance review includes comprehensive loyalty tax assessment, policy feature comparison, and personalised recommendations based on health status, family circumstances, and financial priorities.

Sources & References

¹ KPMG Australia, "Life Insurance Industry Insights 2023," customer impact data to 31 December 2022

² KPMG Australia, "Life Insurance Industry Insights 2023," market size data to 31 December 2022

³ APRA Life Insurance Statistics, direct premium income to 30 June 2023

⁴ KPMG Australia, "Life Insurance Industry Insights 2023," financial performance analysis to 30 June 2023

⁵ Industry knowledge based on APRA 2021 insurance reforms implementation

⁶ TAL Life Limited, "Alterations for Affordability Guide – Accelerated Protection," December 2022

Professional Insights: Christopher Hall, Arrow Equities (AFSL 526688), based on review of 500+ Australian insurance policies

All statistics and data points referenced are current as of article publication date (January 2026) and represent the most recent publicly available industry information.

Educational Disclaimer: This content is for educational purposes only and does not constitute financial advice. Past performance is no guarantee of future results.

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