Australia is in the midst of a national mental health crisis that is placing an unprecedented strain on the nation’s social and financial safety net with more than $13.2 billion spent on mental health-related services each year.

Life insurers play a critical role supporting Australians experiencing mental illness by providing financial protection when it’s needed most. However, the sustainability of this support is clearly under growing pressure.  

According to the Council of Australian Life Insurers (CALI), there has been a 730% increase in permanent disability claims related to mental health among Australians aged 30 to 40 over the past decade. Mental health now accounts for 36% of all permanent disability claims in this age group, compared with just 10.1% in 2013. Last year life insurers paid a total of $2.2 billion in retail mental health claims.

This unprecedented increase not only highlights the growing burden of mental illness but also raises concerns about the long-term financial sustainability of life insurance products designed to provide this support.

Life insurers want to continue to support customers but the challenge is how to maintain meaningful coverage for mental health while ensuring life insurance remains affordable and sustainable for the majority of Australians?

While life insurance is traditionally known for providing financial support in the event of death, today, much of the cover provided by the industry is disability insurance and many of the claims on such cover involve mental health conditions. 

Research shows a rapid decline in the mental health of people born in the 1990s over the past two decades, with this cohort exhibiting poorer mental health than previous generations at the same age. Unlike previous generations, they are not showing improvements in mental health as they age.

The result is an escalating demand across all parts of the system—including life insurers who work alongside others such as Medicare, the National Disability Insurance Scheme (NDIS), private health insurance, and state-based injury and disability schemes. 

Governments have already begun to act on the affordability and sustainability challenges of supporting mental health through public insurance schemes.

In Victoria, significant reforms to the WorkCover scheme came into effect last year. The changes introduced stricter eligibility for mental injury claims, requiring a formal diagnosis, proof that employment is the main cause, and excluding cases of general workplace stress or burnout.

In NSW, similar concerns are emerging. The NSW Government has warned that without reform, the workers compensation scheme may become unsustainable within five to ten years. 

Proposals include increasing the Whole Person Impairment (WPI) threshold for mental health claims, enhancing workplace prevention and mental health programs, and refining enforcement and definitions for more targeted support.

Life insurance must continue to play a role in supporting Australians with mental illness. The value of financial protection to those suffering from a mental health condition—when the ability to work and earn an income is often impaired—cannot be overstated.

However, there is a clear trade-off between coverage and affordability. As claims rise, so too do premiums. For life insurance to remain a truly inclusive safety net, coverage must be designed in a way that keeps premiums within reach of Australians, particularly at a time of heightened cost of living pressures.

That means finding the right balance between premiums that are affordable for customers, and consistent with customer expectations, the scope of conditions covered, and the severity thresholds for eligibility. 

Australians deserve access to the financial support life insurance provides in the event of mental illness. If that is to continue to be possible, the industry must take proactive steps now by innovating products, considering severity directly linked to medical evidence, and engaging with stakeholders to define appropriate support that is meaningful and affordable.

By taking a balanced approach—offering appropriate levels of support, supporting customers with severe conditions, and ensuring long-term viability—life insurers can continue to support financial resilience for Australians during some of life’s most difficult moments.

Now is the time for thoughtful reform, system-wide collaboration, and a firm commitment to sustainability. Because mental health is not only a national crisis - it is also a shared responsibility.