Frequently asked questions

What is insurance underwriting?

Not all life insurance policies are underwritten, but because some are, it is important to understand what the term means. Underwriting is a term used by life insurers to describe the process of assessing risk, ensuring that the cost of the cover is proportionate to the risks faced by the individual concerned. People with the same or similar risk pay the same or similar premium rates.

The process of underwriting takes place when you submit your application. To assess a person’s risk, life insurers rely on information from a range of sources. If you are applying for a policy that is underwritten, as a minimum you will be asked to complete an application form and a medical questionnaire.

Approximately 93% of applicants that go through the underwriting process will not experience any difficulty and will end up paying the standard premium rates for their life insurance. People who have a higher risk of developing a chronic illness, or who work in high risk occupations, are usually required to complete additional forms and may be asked to pay an extra premium to cover this risk. This only happens to a small proportion of applicants. And an even smaller number may not be eligible for cover at all.

Remember, if you have access to insurance through a superannuation scheme via your employer, the insurance company may decide not to assess the risks for every individual in their scheme. Instead they may spread the risk across everyone in the group. This is called a ‘Group Policy’.

What is non disclosure?

When you apply for personal risk insurance the insurer will ask a lot of questions about your health. This is so that the insurer can assess the likelihood of you making a claim and for setting the premium. You must answer these questions completely and honestly. If you don’t, the insurer is entitled to refuse a claim on the grounds of ‘non-disclosure’, with or without a return of your premiums.

When you apply for insurance, the insurance company will rely on the information it receives to decide on the terms and conditions for your insurance. It will ask for certain particulars and you must provide complete, up to date and relevant information in response to any questions asked.

You must also tell the insurer of any information that you may have that will be “material” to the risk you wish to insure. This includes any information that would influence the decision of a prudent insurer to decide whether to accept the insurance and if so, the terms that will apply including the level of premium, limitations on cover, an exclusion, or any other special conditions.

If in doubt, you should give information to the insurer for consideration. The disclosure duty exists not only when the insurance is taken out but also while your application is being underwritten.

The most common thing people fail to disclose is with their pre-existing medical conditions. In many cases, people accidentally leave out information because they have forgotten, or do not realise it is important.

For example, a health insurance claim for surgery was declined because when the consumer applied for insurance and she had not disclosed she had depression years before. Although it didn’t relate to her claim, the insurer was still entitled to avoid the entire policy, because the information about depression would have changed the terms on which the policy was issued.

The current law requires a consumer to disclose to an insurer all information a “prudent underwriter” would consider important. This is extremely difficult for consumers to understand but for the time being this is the legal requirement. Insurers do tell their customers they need certain information, but frequently consumers don’t understand the consequences of not providing the information meaning claims are denied and policies are cancelled.

Who can be a policy owner?

At claim time, who do you want the benefit to be paid to? Is it you, your parents, spouse, partner, or even the Trustees of your family trust? Who can be the owner of the life insurance policy? There are several ownership options to consider when it comes to your insurance policy.

SELF OWNERSHIP Self-owned policies are perhaps the most common form of life insurance and are the easiest to administer. This obviously means that the life insured owns the policy and therefore has full control over their own life insurance. Changes to the policy can all be taken care of by the one person, while the policy is simple to administer if changes occur to your life circumstances—for example you get divorced.

CROSS OWNERSHIP Also known as third-party ownership, this structure means that someone other than you will own your policy. This can be quite a common approach for married couples where each spouse owns their partner’s policy. Cross ownership does have its advantages, especially for those who rely on someone else (e.g. their spouse) for a stream of income. However, if your marriage breaks down and you have cross owned life insurance policies, difficulties may arise.

JOINT OWNERSHIP This is another ownership structure you can consider if you’re married or in a relationship. A hybrid of self and cross ownership, joint ownership allows you to still have some control over your policy. However, keep in mind that any proposed changes to the policy must be approved and signed off by both owners. Once again, divorce or relationship breakdown can result in difficulties with this type of ownership.

COMPANY OR TRUST Insurance policies can also be owned by a corporate entity. Businesses may take out key person insurance on an employee, and this may let them claim a tax deduction for the premium and also cover the loss of revenue resulting from the loss of a key person. Alternatively, policies can be owned by the Trustees of a Family Trust – not the trust itself.

SUPERANNUATION SCHEME You can also own a life insurance policy through an employer’s superannuation scheme. Because super schemes can offer certain insurance policies purchased at group rates rather than individual rates, these policies will be offered at very competitive prices. No medical exams are required for you to take out basic cover and often include disability covers.

When should I review my cover?

If you already have some insurance, your policies should be reviewed periodically. Shop around yourself to get the best deal. Sometime this can be technically challenging as different companies’ policy wording appear similar but can have subtle word changes. You should also consider the financial strength of the insurer and their claims paying rating.

The policy wording is all-important in determining whether an insurance claim is paid. This is particularly true of ‘living’ insurances, e.g. disability income and trauma or critical illness where you need to meet the disability definition or actually be diagnosed with one of the critical illnesses before a payment is made. You should either obtain the actual policy wording to compare policies and ensure that the chosen policy meets your needs, or preferably get advice from an appropriately qualified insurance financial adviser to help you with policy wordings and subtle differences. Price is only one of the many considerations.

All licensed insurance companies must give you their financial strength rating before you apply for insurance or, if they don’t have a financial strength rating, the reason why (typically, if they are small insurers). The financial strength rating will also be on the insurer’s internet site. This will give you an idea of the present financial strength of the insurer. If the financial strength rating is downgraded, the insurer must tell existing policyholders.

You should consider what other benefits and insurances you have. Insurance provided through your employer is typically cheaper than individually arranged insurance and can generally be replaced by individual insurance when you leave your employer. (However, you should check as you may be left without insurance if, e.g., you have to leave your employer for health reasons.) If you have significant sick or other leave, a longer waiting period on a disability income policy will reduce the premium.

While you should always be considering the best deal on your insurance, there are some things you should be aware of if you consider changing insurer.

• The new policy wording may not be exactly the same which may lead to loss of options, new waiting periods or an unpleasant surprise when a claim is made.
  
  
• Your health may have changed meaning that existing conditions may not be covered by a new insurer and a new insurer may impose new terms before accepting the insurance. Your present insurer is bound by the terms of the present policy regardless of changes in your health.
  
  
• If for any reason you forget to disclose all health information requested to the new insurer, you run the risk of the new insurer declining a claim.
  
  
• If a financial adviser is recommending you change companies, ask what commission they will receive for the new policy and an assurance that the new insurance meets your needs at least as well in terms of price and features.
  
  
• There may be options under your present policy or your present insurer may be willing to change it to meet your changing needs.
  
  
• Finally, before you change from one company to another, it is extremely important to read the following brochure. If you are making this change with a Registered or Authorised Financial Adviser, the Policy Replacement Form is required to be completed with you. This is to protect your best interests.
  
  Replacement policy brochure

How can ACC and other government benefits help?

In New Zealand we are privileged to have ACC but it only applies to accidental injuries. This is 80% of your “taxable income” but ACC does not pay anything if you become ill and cannot work, or die from disease. Degenerative conditions that haven’t been caused by your work are also not covered.

There are other government benefits, but these are not related to what you earn, e.g. a Supported Living Payment (formerly a Sickness Benefit) - (up-to-date figures here).

These Benefits are taxable, like income received from ACC. For a more detailed Q & A on Income Protection, click here: FSC

Do insurance payments (premiums) stay the same through the years?

“Age-related” premiums start off cheaper but increase with age. “Level” premiums stay the same over the life of the policy, so may seem more expensive to start, but give you greater certainty over time.

How long can the product or policy be continued?

Know when your product ceases, e.g. at a specific age, or after a specified number of years. Also, does your insurance company (the insurer) allow you the option to continue your cover after the cover ceases without having to update your current health status? If it does, will the premiums increase?

Will your policy pay out if you become terminally ill and if so, how early?

Being terminally ill means you have been offered or given treatment that either no longer helps, or the situation is so severe that no further treatment will extend your life. Ask for an estimate of what you might pay in premiums over the next 10 years. You may like to compare this with other insurers.

Understand the limitations (Exclusions) of your policy and what it won’t be paid out for. For example, missed premium payments, no payment within the first 2 or 3 years, your residency status, a specific health condition like HIV, suicide, any countries where there is war or terrorism, etc.