July 24, 2010
 By Bruce Cameron
Life assurance is not a case of all sizes fit all. Life assurance companies take all sorts of things into account in deciding whterh you are "insurable" or not, and how much they will charge in premiums to cover anything from death to the loss of your job. In the third part of our "How to" series on life assurance, Personal Finance looks at the significant issues involved in determining how risky you are to insure.
When you apply for life assurance, you must complete a questionnaire that may ask questions ranging from the state of your health to the age of your parents or the reasons for their deaths, through to your qualifications and employment. You may also be required to undergo an extensive medical examination.
Leanne Dewey, Liberty Life's legal executive, says the reason for this is to allow a life assurance company to determine whether or not the policy you have applied for should be issued and what premium you should pay. This process of assessment is known in the assurance industry as underwriting.
Dewey says life assurance cover must be provided on an equitable basis. This means you will be charged a premium rate that corresponds to the risk you present to the company. The greater the risk you pose, say, of dying early because you smoke, earn your living from defusing bombs, parachute from high buildings for fun and suffer from a dicky heart, the greater the chance a life assurance company will refuse to insure you, or exclude certain causes of death and/or charge you a significantly higher premium than it would for a healthy, non-smoking, accountant who works from nine to five and goes to gym every day.
Anti-selection
If you deliberately, or even innocently, do not disclose all the information required, or if a life assurance company is prevented by law from asking for informa- tion it needs to understand your complete risk profile, it could be in trouble.
Any imbalance of information between you and a life assurance company where you withhold information is known in the industry as "anti-selection".
Dewey says that the costs of earlier-than-anticipated claims for benefits are cross-subsidised by all policyholders, called the insurance pool. An increased possibility of claims can cause premiums to go up for all policyholders, or products to be withdrawn, or even, in extreme cases, for the assurance company to collapse.
"These outcomes lead to lower availability, affordability and choice of private assurance for society as a whole," he says.
Dewey says underwriting is of considerable benefit to policyholders and allows insurers to provide cover for unexpected losses at fair and reasonable prices.
You cannot shop around hoping to catch out another life assurance company if you have applied to one and it has refused you or charged higher premiums because it and you have discovered you have a dicky heart. These are questions you will be asked when going through the underwriting process with another assurer.
Silly move
You may think you are being particularly smart by misleading a life assurance company, but it is a silly move because if, when it comes time to pay a benefit, the life company finds out that it has been misled, it will repudiate your claim.
This could result in your condemning your dependants to a life of penury in the event of your premature death; or both you and your dependants to poverty if you are disabled and unable to work.
It is better to pay more in premiums than to lose everything.
Dewey says the law compels you "to honestly disclose all information likely to influence the judgment of the assurer when determining appropriate policy terms and premiums".
WHAT YOU MUST TELL YOUR ASSURANCE COMPANY BEFORE IT CAN UNDERWRITE YOU
The starting point of what premium rate you will pay on a life assurance policy is based on mortality tables, which tell life assurance companies how many years on average anyone of a particular age is likely to live.
There are mortality tables for both men and women, because women, on average, live longer than men. So an average 60-year-old man will pay more in premiums than a 60-year-old woman because the man will, on average, die far earlier than the woman.
Leanne Dewey, Liberty Life's legal executive, says the life assurance company will then, through underwriting, assess whether the risk you present to it is above or below the average in the mortality table. There are a number of factors that influence the assessment of individual risk.
A life assurance company assesses both what is called mortality risk (the probability of an early death) and morbidity risk (the probability of ill health or disability).
Dewey says mortality risk is used for life assurance and morbidity risk for disability assurance. Factors that may influence the morbidity risk may not necessarily affect the mortality risk.
The main factors that influence the assessment of your individual risk are:
Your physical condition. This includes factors such as fitness.
Your medical history. Past illness and current health may affect your life expectancy. Medical questions help determine one's mortality risk from health factors. These could be genetic, have developed over time, or will emerge as a result of lifestyle factors.
Your lifestyle. Health risk factors that may emerge in the future can be determined by lifestyle choice questions on, for example, smoking, alcohol consumption and drug use.
Your family's medical history. Genetic factors can be determined through family history questions that indicate a history of hereditary diseases - for example, heart disease, diabetes and cancer.
Your qualifications and occupation. The better educated you are and the more you are paid, the better your lifestyle, and consequently your health, is likely to be. The riskiness of your job is also taken into account.
Hazardous sports or pursuits.
The environment in which you live.
Most life assurance companies will underwrite you upfront, but some, particularly direct-selling operations, do so only at the claims stage.
If the underwriting is undertaken at the claims stage there is a far greater chance of the claim being repudiated. You could pay premiums for years and find out only when you submit a claim that you are not covered because of some fine print which allows the company to repudiate the claim.
Dewey says a claim should be denied only if you did not disclose material information to the insurer when you applied for the cover; or if there are specific conditions under which a claim will not be paid (exclusions) in terms of the policy; or if the claim is for an event that is not covered under the policy. This could be, for example, a claim for medical expenses on a disability policy. Such expenses would not be covered because disability cover is linked to your occupation and your ability to work, not to the expenses you incurred as a result of an injury that prevents you from working.
WHO GETS THE MONEY
You can decide in most cases who receives the money from your life assurance policy on your death.
You can name a beneficiary, which can be a dependant, your estate or a charity.
It is an advantage for your dependants if you name them as beneficiaries because they will have quick access to money. If the money goes to your estate it could take months or years, in extreme cases, to get access to the money.
If you nominate a beneficiary, apart from your estate, you will not pay executor fees on that money.
Leanne Dewey, Liberty Life's legal executive, says you need to calculate how much money you may need to leave to dependants, particularly for short-term cash needs, and to your estate to pay such things as debts and taxes, including estate duty.
Dewey says, however, that you need to ensure your financial affairs are in good order. If they are not you may have problems. Examples are:
Insolvency prior to death: The Long-Term Insurance Act makes provision for a total amount of R50 000 to be protected on insolvency. To be protected, your policy/ies must have been in force for at least three years before insolvency, the insolvent must be the owner of the policy (policyholder) and the life assured must be either the policyholder or his/her spouse.
Insolvency on death: If you are found to be insolvent at the time of your death, your estate will be administered as an insolvent estate, in terms of the Administration of Deceased Estates Act or the Insolvency Act, whichever will provide a better return for creditors.
Dewey says assume you take out a policy on your life for the benefit of your spouse. Unless you cede the policy to your spouse, as long as you remain alive your spouse, as the named beneficiary, has no rights to the proceeds of the policy. You can change the beneficiary as and when you please. On your death, the contract between you and the life insurance company comes to an end. A new contract is formed between the assurer and your spouse as the nominated beneficiary, and not your insolvent estate. The benefits must be paid to your spouse, unless there is a valid legal obligation on your spouse to settle your debts.
Your spouse would be liable for your debts if:
You are married in community of property. A surviving spouse is jointly and severally liable for the debt.
Your spouse stood surety for your debt.
  
 
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