Life insurance exclusions and loadings explained
For insurance companies, denying life insurance coverage, either completely or temporarily, is always the last resort. Fortunately, there are few occasions when this needs to happen. This is due to the various options available to the life insurance company.
To compensate for a medical condition, a hazardous pursuit, or a dangerous occupation, an insurer may give you two options; to accept a loading, or take out the policy with a life insurance exclusion.
From an insurers perspective a life insurance loading is always preferable to excluding a risk event, or at worst, declining cover altogether. Importantly, it ensures you are fully covered for all events the policy was intended to provide. But it's not always that simple in practice.
Often a life insurance exclusion will be offered with respect to non-medical conditions. For example, a client who participates in motor racing may be given the choice of excluding that activity from the cover.
In these circumstances, the adviser (xLife) would usually recommend that you opt for unrestricted cover, accepting a life insurance loading rather than the exclusion. However, financial or other circumstances mean you may be compelled to take the exclusion option. Doing this could expose you to what may be a significant protection gap.
Avoiding a protection gap
If loadings are prohibitive, there are two main ways to restructure your cover to reduce this protection gap.
The first is to reduce the amount of life cover, and accepting the loading on the lower amount.
The second is to split the risk by having a proportion of the life cover loaded, and the remaining amount subject to the exclusion.
The choice of how the cover is structured is something that needs to be discussed with your xLife financial adviser, and will obviously depend on your personal circumstances. But whatever the outcome, having some cover in place is undoubtedly much better than being fully exposed.
What if a life insurance policy exclusion is unavoidable?
Unfortunately, there are instances where an insurer will only be able to offer cover with an exclusion. This situation can occur where:
- the risk is so significant that it's beyond the life insurance company's risk appetite
- the data isn't available to formulate a basis for calculating a loading commensurate to the risk.
When trauma insurance was first introduced, there were a significant number of exclusions applied because of the lack of data, especially relating to claims experience.
More recently, as useful data has become available, we have seen some significant changes (particularly around the partial benefits), with insurers now looking to offer loadings as an alternative to an exclusion.
A good example of this is a client who has a family history of melanoma or diabetes. In the past, these applicants would have only been offered an exclusion on their partial payments for these type of conditions. Nowadays a loading option may also be available.
Why is life insurance coverage sometimes deferred or declined?
In some extreme circumstances, an exclusion is a not a suitable option for the insurance company to offer, and the cover must be deferred or declined outright.
This is often because the wording of an exclusion must be well defined, as it may form the basis for the assessment of a future claim against the policy. Accordingly, the offering of an exclusion is limited to situations where a medical (or occupational/pastime) condition can be unambiguously isolated and identified.
For example, exclusions are particularly effective for musculo-skeletal conditions (such as a knee injury). But they're less effective for systemic medical conditions such as severe diabetes, where a claimable complication could include blindness, kidney problems or peripheral vascular disease.
Life insurance companies in Australia usually try to avoid deferring or declining an application, leaving it as a last resort. Every effort is made by Australian insurers to try and offer non-standard risk cover with a loading or exclusion wherever possible.
Can a life insurance policy exclusion be removed?
As with loadings, all underwriters should be prepared to review exclusions.
If you have returned to a standard risk as a result of medical treatment, or after having ceased a hazardous occupation or pastime, favourable consideration should be given to removing the exclusion.
Generally, the insurer will want to see a period of time where you have been totally free of symptoms, and be satisfied that the condition has stabilised to the extent that the original decision can be modified.
In the case of non-medical exclusions, the life insurance company will need to be convinced that you have permanently ceased the activity, and there is no likelihood of them taking it up again.
In some circumstances, it may be difficult to come to this conclusion because of various factors. But whatever the situation, the insurer should work with you to position the reasoning for decision so that the policy is not at risk of being cancelled (e.g. by agreeing to defer the decision until certain criteria are met).
Do you have an exclusion or loading?
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June 2010
