Life Insurance 101 – Tips from an insider
Insurance is a grudge purchase, I've never met anyone that loves paying for it. Even financial advisors hate paying their own premiums (if they actually have insurance - that's right, many don't!). You may hate to see your car insurance debit order leaving your account, but when you have an accident you are really glad that you are covered. Unlike short-term insurance, people believe they will never see any tangible benefits of life insurance in their lifetime, and this can make it particularly annoying to pay for.
Despite this, a life policy is incredibly important for securing your family's future. I use the term "life policy" loosely, as it is important to include all possible benefits under this description. Life policies should also cover disability and dreaded disease (severe illnesses such as cancer) - which may impact your ability to provide for your family while you are still alive.
In simple terms, a life policy (or any insurance policy really) is a contract to transfer your financial risks over to a company to be paid out on the occurrence of specific events. I often get asked whether a policy is "good" or "bad", and this question is generally linked to a specific company or incident. For example - such and such company didn't pay my grandfather's claim, therefore they must be bad. Not all policies are the same, not all benefits are the same, and even "good" and reputable companies have terrible benefit options. The simple question I want to answer here is, "how do I know if I have a "good" life policy?"
A "good" policy is one that pays out for what you need it to- it's that simple really. Many judge whether a policy was 'good' after the fact - at claim stage. If it pays then it was a 'good' policy to have. The trick is trying to judge and knowing what to look for before claiming to ensure you maximize the ability to claim. Most claims that are declined are simply not valid claims based on the terms and conditions of the contract - the contract that you initially agreed to.
Below are a few things to check on, whether you have an existing policy or are signing a new one, to ensure that you don't realise at claim stage that your policy wasn't as 'good' as you thought:
1. Policy Structure
Before getting into the underlying benefits and increasing your ability to claim, the first thing you should establish is whether the policy has a comprehensive basic structure. Ignore what companies say in their advertising or how the salesperson describes the policy, a comprehensive policy structure is simple to assess. It covers you in the event of Death, Disability and Dreaded Disease (Severe Illness) - easy to remember - the 3Ds of life insurance, without them you don't have a truly comprehensive policy. While this is a good starting point, don't presume that simply covering these is enough, look deeper into each point.
Key Question: Does my policy include Death, Disability and Dreaded Disease?
2. Disability Cover
Disability is a notoriously tricky benefit, in 10 years I've seen a handful of successful claims. Very often claims are not paid out because the policy only covers certain risks - narrowing the policy holder's ability to claim rather than covering a broad spectrum of risk. There are two types of Disability cover - Lump Sum Disability Cover, which pays out a lump sum to the policy holder upon becoming disabled and Income Protection which pays out a monthly income and covers you if you are no longer able to earn an income due to disability (or illness). A policy should have both types of Disability cover included in order to be considered comprehensive. There are two levels of claims in the area of Lump Sum Disability Cover - Capital Disability (can't earn a living) and Impairment (can't use a part of the body), most insurance companies have versions of cover that pay out on either you being unable to work (Capital) or unable to use a part of your body (Impairment) or both. Barring very specific circumstances, a personal insurance policy should always have a Disability benefit that pays for BOTH claim events. If your policy doesn't then you've left a gaping hole in your safety net.
Key Question: Does my Disability cover include Lump Sum Disability (Capital and Impairment claims) and Income Protection?
3. Dreaded Disease
This is perhaps the most important, and most underutilised benefit. In the last 18 months I've dealt with multiple claims pertaining to Dreaded Disease. It's also the benefit with the largest variance from one company to the next, with direct insurers being particularly poor. Each company has a different name for their particular benefit and this can be very confusing for policy holders without proper guidance. There is however an industry standard that makes it fairly simple to assess if you know what to look for. The Standardised Critical Illness Definitions Project (SCIDEP - Pronounced "Sky-Dep") allows anyone to assess how a Dreaded Disease benefit will pay out for the four main claim events, which account for 90% of industry claims. These are Stroke, Cancer, Heart Attack and Heart Bypass. All Dreaded Disease benefits must include a SCIDEP table that shows what percentage is paid based on the severity of each of these four events. For a "good" benefit structure this table should reflect a 100% payout for all severity levels, anything less and your safety net becomes unreliable. There is more to this benefit than just the SCIDEP table, but a 100% SCIDEP table is an easy factor to look for as a starting point for comprehensive and reliable cover.
Key Question: Does my Dreaded Disease benefit have a 100% SCIDEP payout at all levels?
All insurance policies have certain general exclusions and it is important to be familiar with them and how they are applied to your policy. For example, life policies commonly don't cover suicide in the first 24 months or will not cover the policy holder if they die in the act of committing a crime. These are generally understood and accepted in the industry, but it's important to drill down a little more as some companies have additional general exclusions that you may not be aware of. For example, some policies can have blanket exclusions on some physical conditions, like on the back or the spine or even mental illnesses such as depression. This means that you may think you have a comprehensive Disability benefit but if you suffer from a back problem or psychological event you will not be able to claim, even if you don't have a pre-existing condition.
Policies can also include special exclusions for the individual policy holder based on the information they've provided or based on their medical history and underwriting. Sometimes these are unavoidable, and if you have a pre-existing condition you may have to accept the policy terms, but not all insurance companies view pre-existing conditions in the same way. It's important that if you encounter a special exclusion on your policy that you check with other insurers to establish if you could get better terms. In some instances this may mean paying more but rather that than providing an insurance company with an additional loophole to not pay a claim when you need it. You may also request that any exclusion be reviewed by your existing insurer, in some instances they change their position on pre-existing conditions over time and can adjust your terms.
Typically companies that sell insurance to you over the phone have a long list of these exclusions, because they don't actually do full underwriting (risk assessment) of the individual client, so they limit their exposure through exclusions. I find some clients get annoyed with the underwriting process, but it ultimately allows you to clearly define the parameters of YOUR contract with the insurance company. The more information the insurer has about you the more clearly they can define your benefits and price your policy. I'm a strong advocate for underwritten policies, even if they take a little more time and effort from the client.
Key Question: Am I fully aware of the exclusions applied to my policy whether general or individual (special)?
By interrogating these four points you can begin to determine whether your policy is a "good" one, before finding out too late that it isn't. They are not the only aspects to consider when assessing your policy, but without understanding these fundamentals you run the risk of taking the word of a salesperson or advisor who may be trying to sell you a particular policy that may not benefit you.
In closing, remember that most insurance companies, particularly those dealing with underwritten policies, have a broad range of benefits and policy options. The same company can sell a dodgy, "bad" benefit to you and sell a comprehensive, "good" benefit to your friend. You can't take insurance companies or policies at face value without asking the right questions. Just as you shouldn't take advice on a "good" policy without looking at the detail, equally don't listen to that guy at a braai telling you about how that huge insurance company is "bad" because they didn't pay his mom's claim
... in fact, in my opinion, you can go a long way if you never take financial advice from anyone at a braai.