Disclose all when taking out a life policy
- Posted by Roger Hendricks
- On 01/09/2016
- 0 Comments
Recently, Personal Finance published a report on Momentum Life being sued for about R100 million following its repudiation of death benefits on policies on the life of the founder of Cozens Recruitment Services, Ladragh Cozens.
Momentum claims it had every right to repudiate the claims, because it says there was not full disclosure of all the risks it was taking on when it issued the policies.
Following the report two weeks ago, a reader sent an email asking whether it would be possible for life companies to provide an optional service whereby you pay an upfront fee for them to verify the information you provide to them.
The reader correctly points out that in some cases “you may have innocently forgotten relevant information and then you get penalised for this when you claim.
“I understand that the companies argue that it would be expensive to do this upfront, but if one is willing to pay for this, then why not? At least then you can rest assured that you are truly covered, unless the life companies are simply relying on the likelihood of incomplete required disclosure to increase the odds of not having to pay out claims.”
An interesting question in my view. You take out life assurance to ensure your dependants will not be left financially insecure if you die.
I am not going to argue the merits of the Cozens case – that will be for the courts to decide. However, in her case, alleged excessive consumption of alcohol was apparently involved.
In most life assurance health questionnaires, you are asked how much you drink. So say you drink, on average, seven glasses of wine a week, but you drink them all on Friday night. You answer seven glasses a week, on average. You are telling the truth.
But, in terms of most definitions, you are then a binge drinker – and binge drinking is dangerous to your health.
Britain’s National Health Service defines binge drinking as consuming eight or more units of alcohol for men and six or more units for women. A large 250ml glass of wine (about a third of a bottle) with 12 percent alcohol is about three units, while a medium 175ml glass is about two units. A can of beer is two or three units depending on the alcohol content.
Binge drinking, even occasionally, is a proven health hazard. Binge drinking regu-larly probably means a drinking problem and a more serious threat to your health, while binge drinking every day probably means alcoholism.
Or let’s say someone is a non-drinking alcoholic and has not had a drink for 20 years when applying for assurance, and states that he or she consumes no alcohol – an honest answer. Two years after a policy is issued, the person reverts to drinking and eventually dies of liver disease – what happens to the claim?
Or what about a moderate drinker, however that is defined, who, after taking out a policy, steadily becomes a heavy drinker? Are these people obliged to tell the life company that they are now alcoholics? And how many heavy drinkers or regular binge drinkers have you met who admit to an alcohol problem? Most have convinced themselves that, if they chose to, they could stop drinking tomorrow.
The problem for the life assurance companies is that they need to know whether they are getting you to pay the correct premium for the risks they are taking on. If everyone paid exactly the same for risk life assurance, those of us who lead healthy lifestyles would be subsidising – through higher premiums – those who are reckless and even irresponsible. But, as the examples above show, there are grey areas.
The grey areas are a problem, because a claim can be repudiated even if you genuinely forgot something or considered it inconsequential.
The problem is far greater with disability claims than with death claims.
Life assurance companies are often accused, both unfairly and sometimes fairly, of “underwriting in arrears”. In other words, they start looking at the claims stage for reasons to repudiate a claim.
And they have a lot of resources to use, which enables them to catch you out if you did not properly disclose information upfront.
One of the assurers’ main weapons is a company called Astute, which is owned by Old Mutual, Sanlam and Liberty.
Among other things, Astute allows life companies to swop information they have on you. So, for example, it could show up, through a check at claims stage, that an alcoholic who did not drink for 22 years was rejected for a life policy 24 years previously because of alcoholism.
If this was not declared upfront, I suggest that the repudiation of a claim would be justified.
I raised the issue of the life companies doing better checks when policies are issued, rather than at the claims stage, with the Association for Savings & Investment SA, to prevent the problem, mainly for dependants, of repudiations (see “Assurers generally ‘very lenient’ at claims stage on non-disclosure”, below).
It all boils down to telling your life company as much as you can about your lifestyle and health to ensure that, if something happens to you, your dependants will receive what you planned they should receive.
ASSURERS GENERALLY ‘VERY LENIENT’ AT CLAIMS STAGE ON NON-DISCLOSURE
Dr Pieter Coetzer, convenor of the medical and underwriting standing committee at the Association for Savings & Investment SA, says that life assurance companies are in business to pay claims. If they developed a reputation for not paying out, no one would take out a risk policy. It is therefore in the best interests of both the assurer and the policyholder to eliminate non-disclosure.
He says validating health disclosures at underwriting (policy-issuing) stage is usually only possible in countries where assurers have access to the full health records of the client, such as in the United Kingdom, with its national health programme. In South Africa there are practical limitations, which include:
* Most policyholders have more than one doctor, and often do not disclose this, or may selectively disclose only those who have favourable information.
* Doctors are busy. Some doctors refuse to undertake administrative tasks such as completing insurance forms.
* Administrative and health assessment costs to the industry can be significant, especially where more than one doctor or specialist is involved.
Coetzer says the reader’s suggestion for more comprehensive checks by the life industry is impractical, because most clients need the cover quickly and have very short turnaround times on wanting their policies implemented.
Coetzer says the non-disclosure of information is generally dealt with very leniently by most insurers. Only information that materially affects the terms of the policy would be regarded as grounds for repudiation. “This means that the policyholder does not have to mention trivialities.”
Not all non-disclosure will affect the payout of the claim. And policyholders who have made honest and complete disclosure should have nothing to worry about. But, Coetzer adds, it is always better to disclose too much than too little.
In cases of material non-disclosure, most companies “do retrospective underwriting, using the information not disclosed to determine what the terms of the policy would have been had full disclosure been made at inception. Any additional premiums that may have resulted because of this are then deducted from the claim amount. In this way, both parties are put into a situation as if everything had been disclosed.
“It is only when the original application would have been declined, or when some health information that would have been required cannot be obtained retrospectively, that the claim is declined in total.”
Coetzer says it is not true that companies investigate health issues at claims stage to look for reasons to decline a claim. “The aim is to verify whether full disclosure was made at inception.”
He says much of the problem can be overcome if everyone truthfully discloses significant health events such as operations, specialist consultations, abnormal scan and blood test results, hospitalisations, medications currently used, current conditions and current habits. You are not expected to remember every minor event such as a sprained ankle.
If you do not know the exact technical details of a health event, such as the medical diagnosis, it is sufficient to mention the year, the name of the doctor involved, and more or less what was wrong. In these cases the assurer can obtain more detailed information from the clinician.
Coetzer also suggests establishing an industry-wide central electronic health database, which could probably be an extension of Astute (see main story above), which could record your health history – but with your permission.
LIFE ASSURANCE DEATH CLAIMS: NUMBERS FOR 2012
Life companies paid out 99 percent of all claims made last year against fully underwritten life policies on death, to a value of R6.8 billion, according to the Association for Savings & Investment SA (Asisa).
In 2012, life assurers honoured 34 724 death benefit claims on fully underwritten life policies and declined 352 (one percent). The 352 repudiated claims amounted to R213.8 million, about three percent of the total value.
Momentum, which is below the average, repudiated one percent of claims (14, with a value of R9.9 million).
Peter Dempsey, Asisa’s deputy chief executive, says the statistics are limited to fully underwritten life policies because these policies are designed to pay claims as long as the policyholder has met the terms and conditions of the policy. This type of life cover is only issued if the policyholder has completed the full underwriting process, which may involve a comprehensive assessment of the assured’s medical history.
Excluded from the data are funeral cover and credit life policies, which are considered partially underwritten life policies.
Dempsey says that with the excluded policies, very limited or no underwriting is required on application, and they usually require applicants only to answer a few health-related questions. The responses are taken at face value and applicants are not required to undergo medical examinations or blood tests.
He says the 352 claims against fully underwritten life policies were declined for the following reasons: non-disclosure (70.3 percent), suicide (20.11 percent), underwriting exclusions, such as serious pre-existing health conditions (6.13 percent) and fraud (3.42 percent).
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