Oran Hall | Non-medical insurance more focused on living benefits

Life insurance companies put a strong premium on the insurability of prospective clients who seek to protect the loved ones they might leave behind in the event of death by using the wide range of products offered by the insurers. For prospects who fall short of the insurability tests, the companies offer non-medical insurance products with a strong focus on living benefits.

Life insurance companies protect themselves against the risk of too many insured people dying early, thus making it necessary for them to settle significant claims and thereby risk their profitability. They set certain standards to help them determine how insurable prospects are. These include the health, medical history, age, occupation, lifestyle choices, and financial stability of people interested in buying their products.

The higher the risk of insuring an individual, the higher the premium the companies charge, but they often reject the applications of people who are deemed to fail their insurability tests.

Non-medical insurance creates an opening for high-risk prospects, many with prior health conditions, including some whose applications were previously declined. This type of insurance requires no comprehensive health examination, and the application process is easier and simpler.

To a great extent, many of the benefits seem to be tailored to the needs of the policy-holders during their lifetime, largely for the purpose of meeting expenses related to adverse health conditions. Many policies seem to focus on critical illness – cancer, heart attack, stroke – for example. There are also provisions for in-hospital benefits resulting from accidents. Nevertheless, although not common to all of the products – not even the majority – some provide funds upon the death of the insured to cover final expenses and other financial obligations.

The lump sum benefits paid often help in meeting the high costs of dealing with the various health situations, and death, but the terms of the various policies are so wide, it is necessary to exercise great care in determining what is best in each situation. It is never safe to assume that because one product offers certain benefits that others also offer them.

In some ways, the features of some products tend to resemble those common to regular life insurance products. I have seen one case in which the product has a cash surrender value, capped at 50 per cent of the basic sum assured, at the end of the 20th year, but before the 100th birthday of the policy-holder. Generally, though, these policies do not have a cash value.

I have also seen another that is equity-linked, without a guaranteed return, as is usually the case, and the fund accumulation benefit and protection – death benefit – element hold up to age 60, but only the insurance protection element carries on thereafter – from 61 to 75. There is another that has automatic indexation.

Non-medical insurance policies – also referred to as coupon policies – have several limitations. I have seen where the benefits are graduated in several cases. For example, if a claim is made in the first 12 months of the policy, the sum paid is equivalent to the premiums paid in that time; 13 to 18 months, the sum paid is 50 per cent of the sum assured; 19-24 months, the sum settled is 75 per cent of the sum assured; and over 24 months, the benefit is the sum assured. Although it is a common drawback that beneficiaries receive only a percentage of the sum assured if death occurs in the initial years, the full sum tends to be paid in cases of accidental death.

Additionally, there are cases in which the pay-out is linked to age. For example, there is a case in which the maximum is $8 million for people 18 to 50 years old, and $7 million for people 51 to 60. There are also cases in which there is a cap on the maximum sum assured, and others in which the level of coverage is contingent on age.

When compared to traditional insurance, non-medical insurance generally offers less coverage for a shorter period, which raises questions about whether it provides the level of protection and the financial safety net that traditional insurance offers, and thus how wide a scope it provides for goal attainment.

Non-medical insurance is useful for people whose health condition, in particular, rules them out of traditional life insurance, but, because of the higher risk to the insurance companies, these policies are generally priced higher than regular life insurance policies.

If you need life insurance, it is worthwhile to consider your needs very carefully and to discuss the available solutions with more than one adviser from competing companies, if you see the need for doing so, or to look at the various policies on the web sites of the companies, before making a decision regarding the kind of product, and the amount, to commit to. You should only buy non-medical insurance if it is suitable for you.

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Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

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finviser.jm@gmail.com