Monday, October 20, 2008

Life Insurance that Doesn’t Pay

How much are you willing to pay for life insurance that most likely won’t be paid if you die? Probably not much, if you know that your family won’t collect. I’ve always been suspicious of life insurance offered by employer benefits plans, and now I have a friend whose situation has confirmed my suspicions in at least one case.

If you die suddenly in some way, there is no problem with life insurance from an employee benefit plan (apart from the fact that you’re dead!). The scenario that always worried me was what if I become terminally ill with cancer or some other horrible disease, and I’m unwilling or unable to continue working? Or maybe I develop a condition that prevents me from passing a physical to get life insurance, and then I get laid off.

A friend of mine is in this last situation, laid off and unable to qualify for life insurance. Years ago, I asked about scenarios like this and was told by my employer that the life insurance is renewable. This means that employees are able to get an individual policy without have to take a physical to prove that they are insurable. Another employer told me the same thing year later.

Jim’s story

To protect my friend’s privacy, I’ll call him Jim. For years Jim paid for about half a million dollars of life insurance through his employer’s benefits plan. Around the time he was laid off, Jim also got some bad news from his doctor. Knowing that he couldn’t qualify for new life insurance, Jim tried to take advantage of the renewability feature of his employer’s plan.

The insurance company that runs the benefits plan for Jim’s employer told Jim that only $200,000 of his life insurance was renewable. This was shocking news. This sounds like a lot of money, but it is far less than the half million he paid for and that his family would need to carry on without him.

Had Jim known years ago that most of his life insurance wasn’t renewable, he would have bought a half million dollar renewable policy on his own instead of using his employer’s plan. Jim lost the opportunity to properly protect his family.

Jim continued on thinking that coverage of $200,000 was better than nothing. The insurance company gave Jim a hard sell on forgetting about renewing his policy and just going for a physical to get the lowest possible premium. Of course, this would actually mean that he would be rejected. Jim stuck to his guns and was told that the renewed $200,000 policy would cost him $50 per month. This isn’t a very competitive rate, but it’s not unusual for the guaranteed renewal rate to be somewhat higher than the going rate.

For Jim, paying a slightly higher rate would be better than no life insurance at all. The insurance company hit him with another hard sell to forget about renewal. When they finally gave up, they then told Jim that his policy would cost $225 per month and that he must have dreamt the $50 figure.

So, now Jim is looking at paying about 7 times as much per unit of coverage than he was paying before, and he only has about 40% as much coverage. It is fair to say that Jim’s life insurance was not truly renewable in any reasonable sense.

What about the rest of us?

You may think that Jim’s case is unusual somehow, but he worked for a large Canadian company whose benefits plan is run by a large Canadian insurance company. There is every reason to believe that a great many Canadians who rely on life insurance through their employers are at risk.

How can you tell if you are at risk?

If you have life insurance through your employer, you need to know whether it is renewable, how much of the insurance is renewable, and what the guaranteed premiums will be. These things should be in writing. If your employer is unable to provide this information in writing, then you have good reason to believe that you may be at risk.

If you are told that insurance companies don’t put this sort of thing in writing, don’t believe it. When I bought my first individual term life insurance policy, the contract contained a table that outlines exactly how much I would pay each year to continue the policy. I had the option to cancel any time if I found a better deal, but the insurance company was obligated to continue my coverage as long as I paid the premiums.

I’d be pleased to hear from anyone with information on how widespread this problem is and if there is anything Jim can do to improve his situation.

12 comments:

  1. I await any comments on this topic as I am very interested as well.

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  2. I believe it is quite widespread. One of my former colleagues has an equally compelling story: his best friend had both mortgage provided insurance (similar to group insurance in that the underwriting is done at death) and private life insurance through my colleague friend.

    Sadly, he died in a snowmobiling accident and had trace amounts of alcohol in his system. The private insurance sent a cheque within 10 days and the mortgage insurance claim was denied.

    I strongly recommend people consider replacing any insurance that has underwriting at time of claim with insurance that has underwriting at time of application. It can actually be cheaper if you are healthier than the group average health, but first and foremost you won't have to worry about whether you actually have coverage or not (of for as much as you thought or not).

    It doesn't care who you work for, and can be converted to a permanent type of insurance should you become ill with a disease that may affect your insurability later on, etc. Lots of reasons to go with private insurance - just do your homework before meeting with an agent - they are also commission based - you may want to pay a fee-only advisor to recommend appropriate coverage and then get the insurance yourself through Kannetix or something.

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  3. Preet: Thanks for the information. I had heard that with mortgage insurance the check to grant or not grant coverage occurs when you make a claim (i.e., when you die). Is this also the case with life insurance obtained through employer benefits plans?

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  4. It varies with the group insurance plan provider. But I have seen many cases where the underwriting will be performed at claim time.

    If you are not filling out long medical questionnaires, it's a good bet you are not as well protected as you may think.

    Note that some private life insurance contracts will also allow you to access 10% of the death benefit ahead of time if you are critically ill and your prognosis is especially poor. This clause seems to have many names, like the Compassionate Care Allowance or what have you, but this may allow someone to access funds while trying to settle their affairs, or to seek alternative treatments if they so desire, etc. Perhaps I'll write up a series comparing private life versus group life - there's lots to cover.

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  5. Preet: Thanks again for the information. I'll be interested to read your life insurance series if you decide to write one. I would be particularly interested in whether there are any laws concerning renewability of life insurance policies that would be relevant to Jim's case.

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  6. Reminds me of a show on CBC TV's "Marketplace" progam. The show dealt with mortgage life insurance, and the conclusion was that it is usually worthless. Say, heaven forbid, you get cancer and die. The policy excludes you if you ever talked to your doctor about cancer, or had a pap smear test, or had your moles checked before accepting the insurance.

    Have a fatal heart attack? Did you ever have your blood pressure tested before you signed up for the insurance (who hasn't)? Well, that excludes you!

    So, your claim is denied, and you get your premiums returned to you. Big help! The lucky ones who never have to try to use the insurance are just stuck with an overpriced insurance plan that probably wouldn't have helped much anyway.

    I may be exaggerating here, I'm not entirely sure. I'm probably confusing some details with the movie "Sicko". Michael Moore's documentaries are not an impartial source.

    Here's the mortgage insurance show from "Marketplace"

    http://www.cbc.ca/marketplace/in_denial/

    Here's a show on automobile credit life insurance:

    http://www.cbc.ca/marketplace/2007/02/credit_insurance.html


    Also, an article on how life insurance is cheaper and more flexible than mortgage insurance.

    http://www.cbc.ca/news/story/2006/09/21/life-insurance.html

    Thanks for the forum to rant a little. I'm off track from your original post, but it's in the same general topic of life insurance.

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  7. Gene: Thanks for the links. I don't mind a little ranting on this topic. People pay for life insurance to protect their families in case the worst happens. What's the point of having life insurance that may or may not pay out? I doubt that very many people would take mortgage life insurance if they knew that the insurance company would decide whether to pay or not after their deaths.

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  8. Just to reinforce what Preet said. I have both private insurance and group insurance from work.

    In both cases, I had to do a lengthy (20 mins) phone interview with what seemed like a million questions. Your habits, family medical history etc. This was followed up by a visit by a nurse/technician who took blood and urine samples along with blood pressure readings.

    So if you get underwriting done at time of purchase, then that is what to expect. If it doesn't happen then you might not be covered as well as you thought.

    Mike

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  9. Mike: It sounds like your life insurance was underwritten at the time of application. The remaining question I have concerns your group life insurance at work. Is it renewable if you leave your employer (voluntarily or otherwise)? If it is renewable, under what terms? As my friend Jim found out, the so-called renewability of his life insurance applied to less than half of his coverage, and his premiums increased by about a factor of 7.

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  10. Michael - good question. I'll have to look into that. I had assumed that if I ever left my company that the insurance would end with the job, which is why I also have private insurance.

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  11. This is one of the reasons why I recommend an individual term life insurance policy. Most policies that are available through an employer aren't portable so if you get laid off you're putting your family at risk. I wish your friend and his family the best.

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  12. yes if you have a policy with a company it is renewable but it also comes with all the exclusion's that a group policy come's with personal life insurance is the best policy to have. term is the best to have whole life is a rip off and life insurance from a company has to many exclusion in them. I meet a lady the other day that had group through her work and she works for a hospital. Her son was diagnios with cancer and was dropped cause had cancer and she had ever checked the cancer policy.

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