Life companies paid 99% of all claims made last year against fully underwritten life policies to a value of R6.8 billion. Only 1% of death benefit claims to a value of R213.8 million were declined.
Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), says this is the first time that consolidated death benefit claims statistics are available in South Africa.
He explains that ASISA and its members decided to evaluate the rate at which claims are paid and declined to provide consumers with the peace of mind that the majority of claims are paid.
“Life companies exist primarily to provide consumers with the option of insuring themselves and their loved ones against the financial impact of an event like death, disability or disease. Policyholders and their beneficiaries should therefore be able to trust that their policies will pay when a life-changing event occurs.”
Dempsey explains that as a starting point it was decided to collect only statistics for claims paid by fully underwritten life policies since these policies are designed to honour 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 life insured’s medical history.
“Fully underwritten life policies will honour claims provided the claim was not fraudulent and as long as the policyholder did not commit suicide within the first two years of taking out the policy, did not die as a result of an excluded condition and did not withhold important information from the insurer when applying for the policy.”
Funeral cover and credit life policies are considered partially underwritten life policies and were therefore excluded from the statistics. These policies apply very limited or no underwriting on application and usually only require applicants 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. For this reason life insurers apply stringent conditions before paying out benefits and claims are declined if it is found that the policyholder failed to disclose relevant information.
Death benefit claims statistics for 2012 were submitted by the 12 long-term insurance companies that offer fully underwritten life cover. The statistics show that in 2012 these life insurers honoured 34 724 death benefit claims and declined 352.
Reasons for declining death benefit claims
Dempsey says the 352 claims against fully underwritten life policies were declined for the following reasons: non-disclosure (70.34%), suicide (20.11%), underwriting exclusions (6.13%) and fraud (3.42%).
Dempsey says of the 352 claims declined in 2012, just over 70% was due to non-disclosure. Non-disclosure refers to the deliberate failure of policyholders to disclose information about a medical or lifestyle condition, which is material to the assessment of the risk to be insured. An example would be if the policyholder does not disclose that he or she participates in dangerous sports or suffers from a serious condition such as diabetes or cancer.
He explains that since the person applying for life cover knows more about the risk to be insured than the insurer, the law compels applicants to honestly disclose all information likely to influence the judgment of the insurer when determining appropriate policy terms and premiums. Policyholders usually resort to non-disclosure in an attempt to secure lower premiums or to obtain cover without exclusions.
Having all the facts at their disposal enables the life insurer’s underwriters to determine the risk that each applicant poses to the insurance company. Dempsey says this is important, because it allows the life insurance company to adjust premiums for different risk categories, thereby ensuring that every person pays a fair premium without subsidising someone who presents a greater risk.
Dempsey says just more than 20% of claims was declined last year due to suicide.
All life insurers apply a two-year exclusion period to suicide in order to prevent someone from taking out life cover with the intention of committing suicide shortly afterwards. This means that if a policyholder commits suicide within the first two years of taking out life cover, no death benefit will be payable to the beneficiaries.
According to Dempsey just over 6% of claims were declined last year, because the death of the policyholder was caused by a condition that had been specifically excluded by the policy.
If, for example, the policyholder suffers from diabetes, but is healthy otherwise, the life insurer may exclude this condition from the life cover. This means that if the policyholder is killed in an accident or dies of a cause unrelated to diabetes, the life policy will pay. If the death is related to the excluded condition, the death benefit will not be paid. Exclusions such as these allow insurers to provide life cover to people at affordable rates.
Dempsey says just over 3% of death benefit claims were declined, because the life company was able to prove criminal intent by either the policyholder or the beneficiary. Claims fraud usually involves the submission of fraudulent documentation and/or syndicate activity aimed at getting the life company to pay a claim to someone not entitled to the benefit.
Dempsey has the following advice for policyholders wanting to make sure that their beneficiaries receive their death benefits should they die:
- Always complete or review the application form, particularly the questionnaire on your medical history and lifestyle.
- Provide detailed information on your state of health and medical history as well as that of your immediate family.
- Disclose all medical information, even if you think it is not important. It is far better to pay the appropriate premium and have an exclusion added to the policy than to not disclose facts and have your beneficiaries’ claim repudiated.
- Be honest about your smoking and drinking habits.
- Disclose dangerous recreational activities such as skydiving and deep sea diving. Also, if your occupation involves risky activities you need to disclose these. Examples include mining, flying aircraft, and working with weapons.
- Shop around for risk cover and compare premiums as well as terms. One company’s premiums might be higher than those offered by another, but then you may find that in return the potential of future risks has already been factored in and you are not required to inform the company of lifestyle changes.
- Make sure you nominate a beneficiary. This enables the life insurance company to pay the proceeds of your life policy directly to your beneficiary, thereby bypassing the deceased estate (although you will still have to pay estate duty on the policy proceeds).
Remember, since the industry is very competitive there are likely to be good reasons for substantial differences in premiums.