- While most claims are paid out as scheduled, thousands were not last year.
- The main reasons include fraud, withholding of essential information and breach of insurance policies.
- In the event of suicide, insurers may also fail to pay benefits.
- For more financial stories, visit the Front page of News24 Business.
Most life and funeral insurance policies pay out as intended, providing South African families with the protection they need when a breadwinner dies or a family member requires a funeral.
Evidence of this is provided by the latest statistics from South African life and funeral insurers, which show that almost 96 percent of claims submitted were paid, resulting in almost R40 billion being paid out to beneficiaries of more than 890 000 policies last year.
Statistics from the South African Savings and Investment Association show that while only 4.1 percent of applications submitted were rejected, this still equates to around 38,000 disappointed applicants, so it is worth knowing why applications are rejected.
Fraud and secrecy
A number of the rejected claims turned out to have been submitted by fraudsters involved in a crime that resulted in the death of the policyholder, says Gareth Friedlander, a member of the ASISA Life and Risk Board Committee.
Life insurers are increasingly uncovering these fraudulent claims, leading to some high-profile convictions.
Another form of fraud occurs when you purchase a policy without disclosing important or relevant information about your health or lifestyle in order to obtain coverage or to purchase coverage at a lower premium than you should pay.
Friedlander says that because you know more about the risk you are trying to insure than the insurer does, you are legally required to honestly disclose any information that might influence the insurer’s judgment in setting appropriate policy terms and premiums. This will ensure that everyone pays a fair premium without subsidizing anyone in poor health.
Withholding material information from a life insurer during the underwriting process is dishonest and gives the life insurance company the right to not pay a claim and void your policy.
This could have devastating financial consequences for your beneficiaries, so be honest when buying insurance. If you have been treated for a medical condition, your insurer may find out.
Coverage exclusions
According to ASISA, the three main exclusions that led to claims being denied are:
suicide
Most policies do not provide suicide protection if the policyholder commits suicide within the first two years of taking out the policy.
Health conditions or dangerous activities
If you have a serious illness when you take out a policy, death as a result of that illness may be excluded from your insurance cover.
The policy may also exclude death resulting from dangerous activities such as motorcycle racing. You should be informed of this exclusion when you take out the policy.
Waiting times
Funeral insurance is usually offered without a medical examination or blood tests. To protect the funeral insurance provider from people only taking out funeral insurance when they have a serious illness and expect to die, this insurance is usually offered with a waiting period of six months in the case of deaths from natural causes.
Policy expiration
Policies also do not pay out if you have not paid your premiums and the policy has lapsed.
According to ASISA, this is a common reason why claims under credit life insurance policies – policies taken out to pay off a loan or other credit agreement in the event of death – are rejected.
If you default on your loan repayments, no premiums will be paid to the life insurer and your insurance coverage will expire, ASISA explains.
Claims under these policies will be denied even if you have paid off the outstanding loan balance. Payouts from credit life insurance policies typically decrease as the outstanding loan balance decreases, and coverage ends once your debt is paid off.
Lesson for life
A settlement with a life insurer following intervention by the Ombudsman for Financial Advisory and Intermediary Services (FAIS) illustrates how life insurers apply exclusions and only accept complaints when it is clear that they have not been properly explained.
According to a recent Ombudsman newsletter, a woman applied for life insurance but was refused cover for death from natural causes, including illness or health events, and was only offered accident insurance, which provides cover in the event that she dies as a result of an accident or crime.
She subsequently died of natural causes and a claim under her policy was denied.
According to the woman’s daughter, her mother was not fully aware that she had only been offered “Life Insurance: Unnatural Death” in the event of an accident and not the life insurance she had applied for.
The insurer listened to the recording of the phone call between the sales representative and the woman and found that, despite all the sales representative’s statements, some concerns remained.
The insurer therefore agreed to reconsider the contract, taking into account the cover the woman would have received at a higher premium. This resulted in the insurer offering her daughter a death benefit of over R232 000.
Accidental death insurance is cheaper than life insurance because it does not cover you against all possible causes of death. However, it does not help your loved ones if you become ill and die, or if you die of a heart attack, for example.
Cover switch
The FAIS Ombudsman points out that he frequently investigates complaints where someone has applied for life insurance but the life insurer, after answering the insurance medical questions, determines that the person is only entitled to accident insurance.
According to the Ombudsman, it often happens that consumers take out accident insurance without being aware of the consequences of changing their insurance coverage.
The agency says there are also cases where individuals apply for life insurance and are accepted, but then they fail to complete certain medical tests or the medical tests are negative and the insurance is automatically converted to accident insurance with the same premium without adequate information being given to the consumer.
According to the Ombudsman, it is crucial that you meet all medical underwriting requirements and that all medical information you provide is truthful and comprehensive.
It is also important to review all insurance documents provided to you – not only when you take out the policy but also periodically thereafter – to ensure that the cover offered meets your needs, the Ombudsman explains.
This article was first published on SmartAboutMoney.co.za., an initiative of the Association for Savings and Investment South Africa (ASISA).
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