Underwriting: Underwriting is the process by which a life office accepts or declines a proposal for cover under a risk product. Where the proposal is accepted, underwriting will determine the specific terms on which the policy is accepted i.e. if the proposal for insurance is accepted at ordinary rates or if a loading or exclusion is required. There are three possible outcomes to the underwriting process:
- In most cases, proposals for risk insurance are accepted at standard rates; or
- The quoted rates and exclusions need to be refined in which case a counter offer letter is issued; or
- The proposal may be declined or a deferred decision may be given.
Client responsibility: The contract of long-term insurance is one of good faith and in this regard the disclosure of medical information must be honest, straightforward and complete in order to enable the insurer to appropriately assess the risk. It is necessary to disclose all information regarding medical background and conditions that affect the risk in terms of an insurance policy when applying for that policy.
Typical products: In general the following benefits are available in this product category: death benefit, disability benefit (lump sum and income), physical/functional impairment benefit, trauma/dread disease/severe illness benefit and funeral benefit/final expenses benefit.
UNDERSTANDING SPECIFIC DIFFERENCES IN HOW THESE TYPICAL PRODUCTS CAN BE IMPLEMENTED
Accelerator rider benefits versus stand-alone benefits
When life insurance was first developed, companies only covered one event, namely the death of the policyholder. However, as the industry evolved life insurance companies started adding other benefits to the range of products on offer. Termed accelerator rider benefits, these benefits were designed to accelerate (reduce) the death benefit or any other benefit it was linked to. Examples include dread disease and lump sum disability benefits.
If, for example, you were insured for a death benefit of R500 000 and a rider benefit of R400 000, a claim under the rider benefit would reduce the value of the death benefit to R100 000 (R500 000 less R400 000). The same would apply where, say, dread disease and a disability benefit were linked to each other.
A growing consumer demand for benefits available independently of life cover led to the introduction of stand-alone rider benefits. A stand-alone benefit can be sold in conjunction with a death benefit but it can also be sold separately. Stand-alone benefits will always be more expensive than accelerator rider benefits since the life insurance company is likely to pay out more if the policyholder claims.
Using the previous example, if the rider benefit had been stand-alone cover, you could claim for R400 000 under the rider benefit and retain the R500 000 life cover. This means the life insurance company may end up paying claims worth
R900 000, instead of the maximum R500 000.
Premium patterns
Level premium pattern
The policy owner can choose to pay a level premium for a level amount of cover over the term of the risk benefit. A change in premium may occur at the end of the guaranteed term. There may be a guarantee that premiums will not increase during a certain period. At the end of the guarantee period the premium may increase as a result of a review of general risk rates. These increases are not impacted on by your age or medical status and you do not need to undergo new medical examinations and blood tests.
Compulsory premium increases and its implications
Compulsory premium increase options all offer initial premiums lower than the level premium pattern, but these premiums are contractually required to increase in a pre-determined way to maintain the chosen level amount of cover. The steeper the premium pattern, the cheaper the initial premium will be. These options therefore do get more expensive over time. Clients should also realise that premium increases due to reviews after the guaranteed term, or due to additional cover, are required on top of scheduled compulsory increases.
Age-rated
The age-rated premium pattern also offers a cheaper initial premium, which will become more expensive over time. In this case, the annual increases follow the shape of the risk curve more closely, which means increases that are lower at the younger ages, and higher at the older ages. The renewal rate at each age typically corresponds to the new business rate at that age.
Cover growth
The following options may be selected to add some growth on cover to the policy. They can be chosen at the outset, and can typically be removed at a later stage if no longer required.
Fixed or pre-determined combinations
These options offer a fixed annual cover increase, for a fixed annual premium increase. For example, a 10% increase in premium each year will secure a 7% cover increase. Other options that are typically available are a 5% premium growth rate, with a 3.5% cover growth rate, or cover that grows at CPI, with premiums growing at CPI+3%. The premium is required to increase at a percentage that is higher than the increase in cover amount, to approximate the increasing cost of each year’s additional cover as the life insured grows older.
When this option is used together with compulsory premium growth, a higher compulsory premium growth rate is required to secure cover growth, e.g. a 10% compulsory premium growth rate, for a 3.5% cover growth per year.
Scheduled annual cover increases
With these options, only the annual cover increases are fixed initially. Each year, the premium increase required will be determined based on the cost of the extra cover at that time, taking into account the age of the life insured at that time. This means that the additional cover becomes more expensive as the life grows older. This allows a variety of cover increase options to be made available, ranging from fixed options, or CPI, to, for example, increases in exchange rates. When this option is used with compulsory premium growth, the cost of the extra cover is required in addition to the compulsory premium growth rate.
DEATH BENEFIT
As the name suggests, this benefit pays out a lump sum in the event that the insured life dies.
DISABILITY BENEFIT
LUMP SUM DISABILITY BENEFIT
The purpose of this cover is to provide a lump sum benefit should the insured person become permanently disabled and therefore unable to work and earn an income (occupationally disabled). The benefit is meant to compensate for future loss of income and costs associated with being disabled. There are two types of lump sum disability cover available:
- Own occupation disability
- Own or reasonable other occupation disability.
The benefit term is normally until the contract anniversary before your 65th birthday.
DISABILITY INCOME / INCOME REPLACER BENEFIT
The purpose of this benefit is to provide a monthly income in the event of the insured becoming temporarily or permanently disabled due to bodily injury or illness such that he/she is unable to perform his/her occupation or a reasonable other occupation as defined in the policy. There are two types of disability income cover available:
- Own occupation disability
- Own or reasonable other occupation disability.
A monthly income amount is paid to replace income lost due to being unable to perform one’s occupation. The monthly income is restricted to a percentage of normal monthly income as defined in the policy, usually 75%.
PHYSICAL / FUNCTIONAL IMPAIRMENT BENEFIT
Physical impairment products typically only provide cover for loss of limbs (fingers, hand, foot, arm or leg), speech, hearing, vision, confinement to a wheelchair and severe burns. In practical terms it covers conditions that will impair one’s ability to move physically. The difference between functional impairment and physical impairment products is that functional Impairment usually covers impairment of any limb or organ (i.e. whole body cover) whereas physical impairment covers only the limbs and senses mentioned.
TRAUMA / DREAD DISEASE / SEVERE ILLNESS BENEFIT
This product is intended to provide benefits in the event that the policyholder suffers a traumatic event or serious illness. Only a limited number of medical conditions will be covered. In each case, the medical diagnosis must agree with the policy definition before the benefit becomes payable.
FUNERAL COVER / FINAL EXPENSES COVER
If tragedy strikes, funeral cover can assist in lightening the burden of your family at a time when they are coping with the loss of a loved one with financial assistance. This cover allows you to help pay for the funeral through a lump sum, as well as to take care of any other immediate costs.
