By Bryan Tucker 16 January 2021
This is a short but rather sad story about a claim we helped get paid after the client wrote to the insurer to cancel his policy.
It was late January. A client of another insurance adviser found himself in financial difficulty, so he took the all too common step of asking his insurer to cancel his policy. It was a shame for him to cancel it at that point, as he'd had the cover in place for more than 15 years. The insurer duly canceled the policy and sent the policyholder a letter to confirm.
Just two weeks later, he began feeling unwell, so he went to visit his doctor. After some tests, the doctor quickly determined that he had a severe form of cancer and was terminally ill. With just months to live, he was now leaving his wife and young family in extreme financial difficulty, despite having put all the right insurance covers in place for almost all of his married life.
His insurance adviser told him there wasn't much that anyone could do since the man had canceled the policy in writing. Had it merely lapsed because of non-payment, he would have had 30 days to get the policy back up and running without the need to provide new health information. When an insurer is asked to restart a policy that the policyholder has canceled in writing, they usually ask for updated health information. They will assume that some claimable event must have occurred after the policy ended.
It was only because the policyholder mentioned his plight to a work colleague who was a Vesta client that I became involved.
I made the simple argument to the insurer that the client was a terminal illness claim when he signed the letter canceling the cover. He just wasn't aware of that fact at the time. Under a terminal illness claim, 100% of the sum insured is payable if the life insured is diagnosed as having less than 12 months to live.
Fortunately, the insurer accepted this logic and paid the $350,000 claim out to his family. Sadly, he passed away within a few months.
Ironically, a while later, I heard about a very similar circumstance in the media involving the same insurer. A member of an employer-funded life insurance scheme was made redundant and given a continuation option - an option to continue the cover at his own cost. Unfortunately, he didn't receive the offer and was diagnosed as terminally ill soon after. I asked the family of the client in my example for permission to pass on their information. I don't know for sure, but I suspect the insurer may have also settled that claim.
HOW TO AVOID THIS ALL TOO COMMON SITUATION
Having worked in the insurance industry for 36 years, I've seen all too many situations like this. It is surprisingly common for someone to cancel their cover outright only to find themselves in a claimable situation within weeks or months. There are a few options you should think about when you first set up your life insurance cover or if/when you come under some financial stress.
Setting up your cover - Level premium option
When implementing life insurance at the outset, consider options to take some of the covers with a fixed premium for a set number of years (or for life) and the remainder with a yearly increasing premium. Insurance can start inexpensive and quickly become less affordable as you age. Having some of your cover on a fixed premium gives you more certainty that you will afford to hold some of your coverage throughout life.
Investigate premium holiday options
With the advent of Covid-19, most insurers have some form of premium holiday option available. This may relieve you of the need to pay premiums while still being covered for up to six months. One insurer (Partners Life) has had this benefit built into its policies since they started.
Gradual reduction of cover rather than straight cancellation
Cancellation isn't the only option. You can gradually reduce the cover to keep the premiums at a reasonable level.
One of my clients found himself in a scary situation where both he and his wife were made redundant within a few weeks of each other. Rather than cancel his cover outright, we worked out an affordable premium for reduced coverage, and he signed the form to make the change. Because his wife was a joint owner, she also needed to sign - so he took the document away.
A week later, she called me to, I assumed, tell me the form was ready to pick up. No, she was calling to tell me she had found her husband dead beside their bed that morning. He'd suffered a massive heart attack because of a known condition. I promptly told her to tear up the forms to reduce the cover, and we set about getting the full claim paid.
If you have no choice but to cancel
If there is no possible way to retain some cover (which I doubt - get some advice!) never send a letter to the insurer canceling the cover. Contact your bank and remove the direct debit so that the insurer can't continue to deduct premiums. If this isn't possible because the same direct debit pays other policies, contact the insurer's customer service department and ask them to remove the policy from the direct debit. If they ask why, say you are reviewing your circumstances.
Premium arrears will build-up, and the policy won't be canceled/lapsed until it is three months in arrears. And if it lapses, you still have up to 30 more days to get it restarted without needing to provide any health information. Using this approach gives you a four-month window where you can remain covered or reverse your decision at no cost or risk.
Having premium arrears with a life insurer won't affect your credit rating, so take the free cover. Who knows, in that four months, your situation might change, and you can get things back on track without losing your cover?
GETTING HELP FROM AN EXPERT
This case is an excellent example of why you should always get advice at all insurance process stages. Both at the initial purchase phase, throughout the policy's life, and when things go wrong.
If you're finding your adviser lacks experience, make sure you get another opinion.
- Personal insurance is a tricky beast. There are many loopholes that an experienced adviser can help you through. Don't give up without getting a second opinion.
- Don't cancel a policy until all other options are exhausted - definitely never send a letter to the insurer canceling your cover.