The long-term insurance industry has become increasingly complex over the years. New entrants into the market have increased competition which, in turn, has given rise to more complex products structures and offerings. Enhancements in medical science also mean that underwriting is now more stringent and comprehensive, meaning that acquiring appropriate insurance cover is both difficult to navigate and administratively intensive. In this article, we’ve provided insight into some of the most common terms in the long-term insurance industry.
Life insurers initially only offered life cover but, over time, additional benefits such as disability and dread disease cover were added. An accelerated benefit effectively reduces your life cover if you claim from any of your other benefits. For instance, if you have life cover of R1 million and claim R200 000 from your dread disease benefit, your life cover will reduce to R800 000. As a result, accelerated benefits are more cost-effective than standalone benefits.
Where the insured chooses an age-rated premium pattern, their premiums will increase each year in line with the additional risk they present to the insurer as a result of the fact that they are older. Age-rated premiums are generally cheaper at the inception of the policy but, as the insured ages, premiums can become unaffordable. The benefit of this type of premium pattern is that it makes life cover affordable for younger people who would not otherwise be able to afford cover. However, when opting for this type of premium, be sure to consider your future affordability.
When taking out a life policy, you will need to nominate a beneficiary (or beneficiaries) to whom the proceeds will be paid in the event of your death, although this is not as simple as it sounds as it depends on your estate planning objectives. If the policy is designed to create liquidity in your estate in the event of your death, then you may want to consider nominating your estate as the beneficiary – keeping in mind that the proceeds will be subject to the executor’s fees. Where you nominate your spouse as the beneficiary, the proceeds will be paid directly to your spouse after death, and these proceeds will not attract estate duty or executor’s fees. It is advisable to check the beneficiary nomination on your policies regularly to ensure that they reflect your wishes.
Buy & Sell insurance
Buy & Sell insurance is cover taken out by business owners on each other’s lives. In the event that one business owner dies, the proceeds of the policy will provide the other business owners with sufficient capital to buy the deceased’s shares. Business assurance cover can be extended to cover the business owners in the event of disability. However, the efficacy of a business assurance policy is wholly dependent on being underpinned by a correctly worded buy & sell agreement.
Many group life policies include what is referred to as a continuation option. If you leave your employment, by exercising the continuation option, you will be able to continue the cover in your personal capacity without the need for underwriting.
Once an applicant has been underwritten, the insurer may issue him with a counter-offer letter that sets out any premium loadings or exclusions that need to be added to the contract of insurance. The applicant will need to carefully consider the terms proposed in the counter-offer letter, following which they can either accept or reject the offer.
Dread disease cover
Sometimes also referred to as severe illness cover, dread disease cover is lump sum insurance that pays out on the diagnosis of a serious illness such as cancer or heart disease. Dread disease cover differs from insurer to insurer, so it is essential to read the small print to determine exactly which illnesses are covered and how severe they need to be in order for the policy to pay out. Almost all policies cover cancer, stroke, and heart disease.
Some life policies include a funeral benefit which is a specific benefit designed to contribute towards the cost of the funeral in the event of death. Generally speaking, a funeral benefit will provide cover for the insured and their family on the same policy, with benefits being paid out on the presentation of a death certificate.
If you have any pre-existing medical conditions, such as depression or back pain, the insurer may exclude these from your policy. They may also include general exclusions such as war, terrorist activity, riots, alcohol, poison, drugs, attempted suicide, self-inflicted injuries, nuclear explosions, and so on. It is always advisable to check your exclusions before signing the policy.
Group life cover
Group life cover is risk cover provided by employers to their employees to provide protection in the event of death, disability, or severe illness. This type of cover is underwritten on a group basis and not on an individual basis and, as a result, the premiums are generally more favourable. It also offers cover without underwriting up to the free cover limit.
When applying for insurance cover, your health status plays an important role in your ability to obtain cover and the pricing of that cover. When completing the application forms, you will be required to fill in your medical history and this information will be used during the underwriting stage. Depending on your age and health status, you may be required to undergo further medical testing before the insurer makes you an offer. You may also have certain pre-existing conditions excluded from your policy.
Income protection benefit
An income protection benefit is designed to replace your income, or a portion of your income, should you become disabled and unable to generate an income. When taking out an income protection benefit, you will need to determine what level of income you would like to insure and until what age. In general, most income protection benefits cease at age 65, although this can depend on the insurance company. It is important to ensure that, when putting an income protection benefit in place, the income keeps pace with inflation. Bear in mind that an income protector does not cover income lost as a result of retrenchment.
Joint life insurance
While a joint life insurance policy covers two lives, it is important to determine whether the policy is a ‘first death’ or ‘second death’ policy. A first death policy pays out on the death of the first dying spouse, whereas a second death policy only pays out when both policyholders have passed away.
Key person cover
Key person insurance is typically a policy taken out on the life of the key person in order to minimise risk to the business if that person died prematurely or became disabled. The company that owns the policy is responsible for paying the premiums and is the nominated beneficiary on the policy. If structured this way, the company can elect for the premiums to be tax-deductible and the proceeds subject to tax. If the key person dies or becomes disabled, the proceeds of the policy will be paid directly to the business. The proceeds effectively provide the company with cash flow to enable the business to continue operations until a replacement is found. Key person insurance can be structured to cover the death or permanent disability of the insured.
Minimum standard requirements
As part of the underwriting process, most insurers have a set of minimum standard requirements that state the number and type of medical tests required depending on the age of the applicant, the sum insured, and the type of cover sought. For instance, a younger person with no pre-existing conditions may require an HIV test only, whereas an older person with an underlying heart condition may require full blood tests and an ECG.
When applying for your life cover, you have a duty to disclose all or any information that may be considered material to the insurer so that the insurer can underwrite you according to the risk you present to them. You are required to disclose any information that is relevant to them including drug usage, pre-existing medical conditions, alcohol intake, smoking habits, dangerous activities, family medical history, mental disorders, back problems, and so on. Any non-disclosure on your part can result in your claim being repudiated at the claims stage, even if the non-disclosure is not material to your claim.
The Long-term Insurance Ombudsman provides independent and objective service to policyholders should they have any complaints arising from their policies. They are contactable at www.ombud.co.za or on 0860 103 236.
The occupation of the insured is taken into account during the underwriting phase because it can impact directly the risk presented to the insurer. Occupation is also closely correlated with income and education, and these factors are also assessed by the insurer. Occupations that present a higher risk will attract higher premiums.
Before applying for life cover, your financial advisor will obtain a set of quotes from a number of insurers to give you a general idea of what your cover will cost. It is always important to obtain comparative quotes because prices and benefits can differ vastly. Bear in mind that the quote is the base price of the insurance prior to medical underwriting.
Some accelerated policies make provision for a reinstatement benefit which effectively makes provision for the death benefit to revert back to the original amount before the dread disease or disability claim was made.
When applying for life insurance, you will be required to provide information on your smoker status and insurers rely on you to provide accurate information in this regard. If you are a smoker, your premiums will be adjusted upwards to account for the risk that you present to the insurer. With the evolution of vaping, e-cigarettes and nicotine replacement therapies, this area of insurance has become more complex. If you are insured and stop smoking for a period of at least 12 months, you can apply to have your premiums reviewed, although your insurer will request that you undergo a cotinine urine test to prove that you have stopped smoking.
Term life insurance provides life cover for a pre-determined period of time, known as the ‘term’. Once the term comes to an end, the cover ceases. If the insured wishes to continue with their cover, they will need to be underwritten following which new premiums will generally apply. Premiums for term life cover are generally lower than whole life cover because the cover is only for a limited period of time and the risk is easier for the insurer to quantify.
Underwriting is a process used by life insurers to assess the overall risk a person presents when applying for life cover. An applicant’s premiums are calculated based on the findings of the risk assessment, although each insurer has its own underwriting process and risk model.
Variable age-related premiums
This premium pattern is similar to an age-rated premium pattern although the compulsory annual increases required at each age are fixed upfront and therefore the premiums increase in a more structured manner year-on-year.
Waiting periods are effectively an underwriting mechanism used by insurers to ensure that clients do not anti-select against the fund. A waiting period means that, although your policy has commenced, you are not yet able to claim against the cover until a pre-determined period of time has lapsed. For instance, if you have a three-month waiting period on your income protection benefit, you will only be able to claim for lost income after three months has lapsed, and this can leave you in a financially precarious position. It is therefore important to determine what, if any, waiting periods you have in place as this will affect your financial planning and your emergency funding requirements.