Many people seem to treat life insurance like short-term insurance – it’s a grudge purchase and not something worth wasting too much time on, and if you are unhappy with one provider you can always switch to another.
Wrong! Insurance on your life or, in the case of disability insurance, on your health, is fundamentally different from insurance on your possessions and is not to be undertaken lightly. You need to get it right the first time, because switching policies or providers, or even upgrading a policy to provide extra cover, involves rewriting the contract between you and the insurer, which will inevitably cost you more.
At the heart of the life insurance contract is the underwriting process: an assessment, through your own disclosures among other information, of the level of risk you pose to the insurer. This week, Liberty held a media discussion on underwriting for life policies, stressing how important it is for people signing up for life or disability insurance to get the process right.
(Note that this article covers fully underwritten insurance policies only. Some insurance companies offer policies that require little or no underwriting upfront. These come with a different set of risks and costs.)
David Jewell, Liberty’s managing executive for retail solutions, said insurance is built on trust. The underwriting at the beginning of the contract is where it all begins, and it determines your future relationship with your insurer. “The promise made at inception stands for life - this assessment of risk is what the contract is based on,” Jewell said.
The assessment factors in your health, gender, age, occupation and lifestyle (including high-risk sporting activities, alcohol consumption and smoking status). The insurer calculates the probability of future adverse events based on the information it receives from you and prices your premiums accordingly. You may need to inform your insurer about certain lifestyle and occupation changes during the life of the policy, but any subsequent deterioration in your health is priced into the contract, and the insurer will fulfil its side of the deal by paying out in the case of a valid claim.
Lisa Gibbon, divisional executive of onboarding at Liberty, said problems arise when the insurer prices the contract on information that is incomplete or incorrect, and finds out only at claims stage that, for example, you had a health condition at the inception of the policy that it was not aware of. “Had we known about the condition, we would have assessed the risk differently,” she said.
Underwriting may involve a written health questionnaire or you may have the choice of a telephone interview with an assessor. Whichever you choose, all questions need to be answered comprehensively and truthfully, and even past conditions or health events that you may think are inconsequential must be disclosed.
Non-disclosure is often not intentional: you may simply forget something or misunderstand an underwriting question.
Liberty listed conditions that are commonly not disclosed by policyholders. They include:
- Past ailments and treatments;
- Minor eye conditions;
- Past mental health issues that may have been addressed;
- Lesions or tumours; and
- The past removal of benign tumours.
Liberty’s medical officer, Dr Reinhardt Erasmus, said many people don’t understand what constitutes a chronic condition. “They’ll say ‘no’ when asked if they have any chronic conditions, but when asked if they are on any treatments, it comes to light that they have high blood pressure, for example.”
Gibbon said the underwriting process is involved and shouldn’t be rushed – the insurer needs to delve into your personal history. “It’s a really intimate discussion between the underwriter and the client to say ‘tell us who you are, tell us what has happened in your life, what has happened to you medically, financially … did you jump out of the sky with a parachute?’ We recommend that you tell us everything, even if you think it is not important, and let us make the decision on whether or not it is relevant.”
She said all information collected by the underwriter is made available to you to check. “Clients have access to the information and must be comfortable with it - it forms the basis of the contract.”
Kobus Kleyn, a Liberty financial adviser partner on the panel, emphasised the importance of the adviser at the inception stage, saying the onus was on the adviser to educate the client. The regulations under which financial advisers operate require that they fully explain policy terms and conditions to their clients and ensure they understand and complete the underwriting questions. He said consumers can complain to the Financial Advice Ombud if a claim is rejected because they didn’t understand something that should have been explained by the adviser.
* Hesse is the former editor of Personal Finance
PERSONAL FINANCE