How to explain policy ratings, declines

From time to time I receive e-mails from consumers with questions like “I wondered if it was legal for insurance companies to refuse to insure children with autism?”

What advisor hasn’t dreaded the rated or declined application conversation with their prospect or client? Since the demise of the captive agents, training on how to handle these situations is almost non-existent.

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But think about what you learned to get life-licensed. You know the answers. What you may not know is how to put it into “kitchen table talk” like this ….

“The short answer is that yes it is legal for insurance companies to refuse or highly rate risks because a life insurance contract is a unilateral contract. That means that once the company has underwritten and issued the policy, the owner of the policy is in complete control—not the life insurance company. Once the contract is issued the life insurance company is obligated to honour all of the guarantees and benefits of the contract and is ‘on the hook’ to pay the death claim when it is filed—whether death happens after the collection of only one monthly payment of years of payments.

We know that life insurance is based on the “a pooling of risk”. What a lot of people don’t know (or remember) is that each member of the “pool” pays their fair share.

An applicant’s “fair share” is based on the assessment of their health, lifestyle (use of drugs and alcohol, criminal infractions like speeding tickets, etc.), family health history, any hazardous sports, hobbies or occupation and travel patterns or plans (e.g. to war-torn countries or other countries on the prohibited list.)

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In other words no member of the pool is being asked to subsidize any other member or group of members in the pool. As consumers of this product we should find that very comforting!

The insurance company has multiple ways of assessing risk factors and definitely has the right to refuse to allow a person “into the pool” if it is their assessment that the risk factors (however the insurance company determines them) are considered to be too high.

It’s that simple, and again as consumers the benefit to us is that this ‘selection process’ keeps the price of life insurance for each of as low and as fair as possible.

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Helena Smeenk Pritchard has over 36 years of experience in the insurance industry and is the Principal of Helena Smeenk Pritchard & Associates, a leader in “Insurance Know-How” training. Helena publishes a weekly free ‘Did You Know’ newsletter on her site.