Each year, the major life assurance companies try to prove to us that they use a large portion of the premiums they collect from us to pay out benefits to the families of those who die while supporting dependants, or to breadwinners who are disabled or suffer a severe illness. They do this by releasing their claims statistics.
This is to counteract the dim view many of us take of life assurance: it’s a grudge purchase we have to make monthly; the life companies ultimately score, as their shareholders want your premiums to exceed what the life companies pay in claims; and it feels like many of us often don’t even get the benefits we expect if we die, are disabled or suffer a severe illness.
But the truth is, most of us need the cover, as we do not have the financial means to support ourselves or our dependants if we are unable to work, or if we die before our debts are paid, or before our dependants are independent.
The Association of Savings & Investments SA (Asisa) also does its bit, informing us of the billions its life-company members pay in benefits, without which many families would be in a lot of trouble.
Recently Asisa said that, in 2015, its 12 life company members paid out R12.3 billion in death claims on fully underwritten policies (more on that below).
According to Asisa, this was close to 99 percent of all the claims lodged for life cover: 35 983 claims were honoured last year, while only 396, valued at R348 million, were declined.
There are three reasons why just over one percent of death claims were not paid, Asisa says.
One reason, accounting for just over half of the rejected claims, is that, in order to pay lower premiums, policyholders did not disclose a medical condition or lifestyle factor on their application forms.Examples are if you take out a policy after you have been diagnosed with a heart condition and you later die from that condition, or you sky dive, fail to tell your insurer and later die in sky diving accident, or you work in an risky job, such as mining or flying a plane or working with weapons, and die in a work-related accident.
The life company will find out after you have died that you had a heart condition, were a regular sky diver, or had a dangerous job, and then the claim will be rejected, to the detriment of your dependants.
As Peter Dempsey, the deputy chief executive officer of Asisa, says, this potentially puts “the future financial well-being of your family in jeopardy, which is “extremely short-sighted”.
The second biggest reason why claims on life policies are rejected is that the person whose life is insured dies of a condition that is specifically excluded on the policy.
Dempsey says a life company can exclude cover for death related to a specific illness from which you suffer, such as diabetes. This means that if the policyholder is killed in an accident or dies of a cause unrelated to diabetes, the life policy will pay. But if the death is related to the excluded condition, the policy will not pay.
He says exclusions such as these allow assurers to provide life cover to people at affordable rates.
The third main reason why death claims are rejected is that all life insurers apply a two-year exclusion period to suicide. This is to prevent someone with the intention of committing suicide from taking out life cover
If you take out a policy and commit suicide within the first two years of taking out the cover, your beneficiaries will not receive a death benefit.
Fraudulent claims are also declined, so don’t try to defraud your assurer, because they are getting good at detecting these claims, and you could even go to jail for your efforts.
Asisa’s stats are encouraging, but you should remember they relate only to death claims, which are typically the least problematic. Getting a claim paid for disability and severe illness usually involves jumping many more hurdles, such as proving your disability prevents you from working and is permanent, or that your severe illness fits the medical criteria.
This week, Old Mutual published its claims statistics, which illustrate this point. It says it paid:
• 99 percent of death claims;
• 93 percent of income disability claims;
• 84 percent of severe illness claims; and
• 78 percent of lump-sum disability claims.
Underwritten policies differ from non-underwritten ones, where you are typically asked only a few health-related questions. The assurers take your word for it and you are not required to undergo medical examinations or blood tests.
But, when it comes to claiming, the assurer will do more checking on policies that are not fully underwritten, to see if you did, in fact, disclose all the relevant information. The Long-Term Insurance Ombudsman has reported that many claims are rejected because policyholders fail to disclose, or fail to understand the questions.
Asisa does not collect claims information on these policies – typically funeral policies and those offering life cover for credit agreements.
Be sure to understand the terms of these policies before you take one out.