Most of us will at some point apply for life insurance, whether young families just starting out, high net worth families looking for estate planning, or businesspeople seeking key-person insurance. The application process includes what seems to be an extensive lifestyle and medical questionnaire. And some people are tempted to gloss over or shade the answers (e.g., smoking) in the belief it will get them insured faster. But that’s the wrong way to look at it, and it could lead to payout being reduced or denied down the road. Here’s why.
1. You may not get what you apply for
To understand this point, it is helpful to know the stages in the life insurance policy application process. They are: completion of the application with or without the help of a life insurance agent; underwriting of the policy by the life insurance company that has “offered” you the policy; and – the last step – your acceptance of the policy. Your acceptance is given when you receive the policy the company has prepared and sign a delivery receipt.
You cannot simply apply for just any vast sum of insurance on any person’s life. The fundamental rule is that you must have an insurable interest in the person whose death triggers payment of the policy proceeds. Insurable interest applies to a spouse, parents, children, or others whose death would cause you financial hardship. For example, this permits a business owner to take out an insurance policy on a key employee. There is no familial relationship, but the business owner can substantiate the dollar value impact of the employee’s death on the business. On a personal level, you cannot insure Uncle Bob or Aunt Mabel unless you can prove that their death will impact you financially.
The second part of this is the amount of insurance that will be issued. Think you can insure your spouse for $50 million and look forward to the payout? Not so, unless you can show that the financial impact of your spouse’s death on you would be $50 million.
There is a relationship between the financial value of a person’s life and the amount of life insurance that can be placed.
The underwriters of the policy will look at both these factors – who and how much – before the policy is issued. If they cannot establish the financial value of the life insured as it has been requested, the policy will not be issued as you have requested.
2. You can’t hide the truth, now or later
Life insurance is a way by which you manage the financial risk of your death to others. The life insurance company must manage the risk you present. It does that through underwriting (basically an investigation of the risk you present) and the amount it charges as a premium.
When an application is being completed, it is essential not to gloss over any of its details. If you smoke even a little, say so. If you drink, even occasionally, put this in writing. Any medical details in your background of which your current physician might be unaware or that might not come up in a standard medical exam must be revealed.
You must also be very cautious in disclosing activities that you engage in that might have a bearing on risk. For instance, let’s say you took a trip south last winter and tried scuba diving. You loved it, and plan to do more in the future. After your initial diving experience, you apply for life insurance. At this point you do not consider yourself a diver, so you do not mention your future plans. But if you proceed with the policy on this basis, and you were to die in a scuba diving accident, your insurer would take a hard look at what you said about your diving activities. If they establish you were diving before the policy was taken out, and you failed to mention this in your application, they could reduce or deny the policy benefit on the basis that you falsely presented your risk when you applied.
This does not mean that insurers will not insure people who engage in so-called “hazardous” activities. They may or may not. If they choose to proceed, they manage the risk by one of two ways. They either charge a higher premium for the policy or they do not pay the policy proceeds if death occurs from participating in the activity.
Be honest up-front when applying for insurance to ensure the policy will provide the protection you intend.
3. You can change your mind
The final step in applying is your signature on delivery of the policy. This starts the clock ticking on the following 10 days during which time you can change your mind. If you do, the policy is rescinded. Coverage ends and any premium you paid will be refunded.
Make sure you take advantage of this period to read the policy you’ve been given. Make sure you understand what it provides, to whom, and when. Mistakes can be inadvertently made by the insurer; the time to catch any errors is now. A life insurance policy is an important document in your financial life and to those who you are protecting by the policy coverage. If you have questions, ask your agent or the issuing company.
When the 10 days are over, the policy is in force. If you died the next day in an accident, the face amount would be paid to your beneficiary. If you died the next day from a medical issue, such as a heart attack, the insurer will look at the policy application and its underwriting to see if you had any prior medical indicators of the condition from which you died.
Even an in-force policy does not obligate you to keeping the policy. At any point, you can stop paying premiums and your policy will lapse. The primary disadvantage is that if you re-apply to reinstate your lapsed policy or apply for a new policy, your application will again go through underwriting. How much time has passed since you first applied? Has your health changed since then? The insurer is going to take a very close look.
Bottom line
Insurance companies specialize in calculating and managing risk. And they are experts at doing so for themselves and their shareholders. Remember, insurance companies and their underwriters have seen it all. Be upfront about any questions presented to you during the application, and chances are very good you’ll be offered a policy on reasonable terms. Insurance companies are in the business of writing policies, not turning them down. But try to hide or shade the truth in the hope that you’ll escape notice, and you – and your beneficiaries – will regret it.
Courtesy Fundata Canada Inc. © 2016.Susan Yates is president of the Centre for Life Insurance and Financial Education (clifece.ca).This article is not intended as personalized advice.
