Avoid Life Insurance Exceptions That Can Hurt You

Many years ago I had a friend who was a little less than trustworthy. He moved away decades ago and I haven’t seen him since. I know through the grapevine that he has been married and divorced four times. I think the source of his problem is a thought he expressed once when we were young.

“You can promise anything so long as you keep the right to change your mind.”

Some insurance coverages have that same idea built in, too.

What’s a pre-existing condition?

Some group life insurance, some association insurance, and most credit insurance have a pre-existing condition exception. In most of the cases there is a cursory medical questionnaire and that makes the arranging easy. Usually the person doing the paper work is not trained in the nature of life insurance.

Obviously the insurer is taking serious risks. They have very little information or evidence on which to base a decision that risks hundreds of thousands of dollars. Seems foolish. Not at all like a life insurance company.

It would be foolish, but they have an out. As you might expect if you thought about it. It is the pre-existing condition clause. (Pre-ex)

If you were an insurer and knew everyone you insured was healthy now and had always been healthy, you could offer a good rate and expect few claims.

You have two ways to get to that point.

  1. Do the work when you get the application. Check medical records, acquire some test results, examine family history, and ask very comprehensive questions about body systems, medication, smoking, drinking and drug use status and family history. This process eliminates about 3% of people who apply, and increases the premium for about 6% more. It’s expensive to do though.
  2. Do the work when you get a claim. That saves a lot of money  because less than about 1% or so of the policies end in a claim. Your research cost is about 1/100th as much.

As my kids used to say, “Yeah but”  What about the claims?

Not a problem. The pre-ex clause will save them most of the time.

How a Pre-ex clause works

Suppose there is a seemingly healthy 35-year-old. He acquires a $400,000 policy to cover his mortgage through his bank. He can answer the banks insurance questionnaire easily. The only bit of a problem is that two years ago he had a severe headache for 3 or 4 days and it went away without a recurrence.  He did visit his doctor but merely got some medication. Maybe it made the pain go away. Who knows? No problem, the questionnaire didn’t ask and he didn’t even remember.

Another three years go by and he dies suddenly from a ruptured brain aneurism. Will they pay?

Of course not. Why would they? There is evidence they found that such a condition existed prior to the application and it was not disclosed and caused his death. So no claim.

“That’s not fair, he didn’t even know” That’s true and yet makes not the slightest difference. Many people are denied payment upon newly discovered cancers, and heart problems. It is not uncommon. If the insurer can establish there was a pre-existing condition that leads to the death, they will win.

Everyone has a potential condition that might cancel a claim. You end up with a policy where if the claim arises, your estate  “might” get paid. That is not exactly “insurance.”

Personally owned coverage is different

A personally owned policy has underwriting done at application time. They would have asked a question that elicited an answer about the headaches. The likely would have gotten a report from his doctor, and if they issued the policy they would pay. I know of a case where the claim was eight months after the policy was issued. They knew about the headaches, but either missed the next level or decided after the reports they had, decided it didn’t matter. Write the cheque.

Personally owned coverage has other advantages too:

  1. It’s portable. It doesn’t go away if your employment changes.
  2. The rates are guaranteed. Group coverages of any kind are adjustable at the wish of the insurer.
  3. None of the employer, the bank,  the association, or the insurer can cancel personally owned coverage. You can if you want to.
  4. In the case of credit insurance, you can designate a beneficiary that suits you instead of the bank.
  5. The coverage amount is what you need, not necessarily a loan balance.

But, as always, there is price.

Never forget that the claim will matter. People who survive the loss of a wage-earner can be insurance poor, too

You must add a little to the process

  1. You have a more onerous set of questions to answer.
  2. You might need more than a questionnaire.
  3. It will take a little longer
  4. You might have to think about your real insurance needs

But the premium? How much is that?

Compared to the bank, it will be less. At least 30% and sometimes as much as 50% less.

Getting more for a lower price seems a decent proposition.

Am I wrong?

The bits to take away

Treat group insurance as an incidental benefit from work.

Never, under any circumstance, get meaningful insurance through your bank.

Never buy any coverage with a pre-existing condition exception

Remember the rule. “You can promise anything so long as you keep the right to change your mind.”


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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don@moneyfyi.com

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