Life insurance is a grudge purchase. You may never see the benefit if you are fortunate enough to never be disabled or die before retirement.
The real benefit, however, is peace of mind that the cover is there if you or your family need it.
Ensuring that you have total peace of mind means entering into a solid contract with your life insurer. And that means understanding that your policy is underwritten and based on your risk.
To properly assess your risk, the insurer relies on your honestly. Watch this video to get a quick understanding of underwriting and why you should not be economical with the truth when you take out insurance.
You can also watch on YouTube.
(full transcript)
Life insurance offers a way to provide for family members when a breadwinner dies.
But it’s not a handout; it’s a contract.
In this contract each party has responsibilities that keep the contract stable.
Your responsibilities:You pay a pre-arranged premium every month.
The insurers responsibilities: They pay a pre-determined amount of cover if you die or become disabled while the cover is in place.
But how is the amount you pay calculated?
The way the contract is built is based on a foundation of facts collected by the insurer about you and your lifestyle.
The insurer assesses those facts and determines your particular risk of dying or becoming disabled based on this information.
This process is called underwriting.
Underwriting determines the amount you pay every month.
It’s the foundation of your contract and its built on honesty.
It means the riskier your lifestyle or the more health issues you have - the more expensive your life insurance.
But….. It can be tempting to downplay your risk to get a lower premium.
You may, for example, decide not to tell the insurer that on weekends you go hang-gliding.
You may, for example, fail to mention that you have diabetes.
You may, for example, call yourself a driver by profession, without mentioning you drive a cash-in-transit van.
Downplaying your personal risk is the same as lying.
The problem comes when someone wants to claim.
If you are not completely honest about your riskiness when building your contract with the insurer, you may find that the contract is void when you, or your family, need it the most.
Even if events are not related.
Say you fail to mention a serious health condition when you take out a policy.
And then you die in a car accident.
If the insurer then finds out you had the condition and if they had known this they wouldn’t have insured your life because your risk of dying is too high.
The insurer can then declare that there was no contract and it will not be obligated to pay your family’s claim.
So, when you are signing your contract for life insurance: Be honest and read it carefully.
Some life insurers don’t ask a lot of questions and you may think it’s easier to get cover from them.
But – these contracts are typically loaded for or any pre-existing conditions you declare and may exclude cover for any you do not disclose.
So, if you die from a heart attack relating to high blood pressure that was excluded or you failed to declare – the insurer will not pay out.
The system is built on assessing the actual real risks you pose from your life and lifestyle.
You can’t “trick” the system. So be careful.
Don’t give your family a false sense of financial security through a dishonest life insurance contract.
If you live life on the edge, rather make alternative arrangements for their financial wellbeing and don’t risk a contract built on slippery ground.
If you want to learn more about life insurance and underwriting, visit Smart About Money.
