In 1971 Evel Knievel, the famous motorcycle-riding daredevil, had a hard time obtaining life insurance. The man known around the world for harrowing jumps and stunts claimed to have been rejected an impressive 37 times by Lloyd’s of London.
In the past, like Evel, other individuals such as pilots and soldiers also had difficulty securing a life insurance policy. Policy providers viewed aviation and acts of war as activities that were simply too risky to insure.
During the past few decades however, policy exclusions have changed. In general the industry has moved toward a more relaxed approach when underwriting policies. Some insurers even work to provide a policy that works with an applicant’s lifestyle – even it if is considered risky. Insurers still consider things like an applicant’s age and health to help assign a classification. But what’s considered risky has also changed in some instances. For example, smoking hasn’t always been considered a risk factor. Today regular smoking can impact your premium. In addition, insurers look at an applicant’s overall risk – meaning their risk of dying and the insurance company being obligated to pay a death benefit to beneficiaries.
Interesting side note: Are you familiar with the MIB (medical information bureau)? It’s like a credit bureau only it’s for your finances. The MIB looks at your medical information, driving habits, and even risky hobbies to assess your medical risk. You may want to request a copy of your file before you apply for or make changes to your life insurance policy. Also, you can request a copy of your file once each year.
Since no two policies are identical, applicants need to carefully read through the fine print to ensure they understand what’s covered and what’s not. The whole point of life insurance is to help ensure your loved ones are taken care of in the event of your death - you don’t want to risk their security in order to skim or speed read your policy.
How are classifications determined?
First let’s look at what a classification is. Classifications are a system insurers use to decide who pays what for coverage. Basically this is how insurers try to gauge and manage their exposure to risk. Classifications are often based on health and lifestyle criteria identified by each insurer. As a result of this process, prior to writing a policy, insurance companies like to get to know a little bit more about a potential customer’s risks. This information helps them assess your insurability and assign a classification and a policy cost. Common application questions include:
• General health.
• Family history.
• Tobacco use.
• Drug and alcohol use.
• General lifestyle.
What are common exclusions?
In addition to assigning a classification, life insurance policies include exclusions. Exclusions are included in a policy to identify specific acts that negate the need for the insurance company to pay out the policy benefits. Common exclusions include:
• Dangerous activity: Includes rock or mountain climbing, piloting small aircraft, scuba diving, etc.
• Illegal activity: If a policyholder dies while participating in an illegal activity, the policy is most often going to be void.
• Suicide: Most policies don’t pay a death benefit if a suicide occurs within the first two years of the policy.
• Act of war: Not a common exclusion any longer, but worth keeping an eye out for.
• Misrepresentation: If an applicant is found to have been misleading or inaccurate on the basics such as age, health, or habits a policy can be void.
You have a policy: Now what?
Securing a life insurance policy can feel a little like clearing a 141-foot jump on a motorcycle. Just because you got everything lined up just right and soared to success once, doesn’t mean you’re done forever.
Like life, your life insurance needs change over time. Revisiting your policy and discussing your current needs with a financial professional each year can help ensure the policy you have is the policy you need.
More than half of Americans today have life insurance of some kind, but nearly half have inadequate coverage according to the 2016 LIMRA, the not-for-profit Life Insurance Market Research Association.
87 MILLION AMERICANS OWN LIFE INSURANCE.
48% OF U.S. HOUSEHOLDS HAVE AN AVERAGE LIFE INSURANCE GAP OF $200,000.
There are plenty of areas of life that are set-it-and-forget-it but your life insurance policy isn’t one of them. Taking an active role in choosing and managing your life insurance is a vital part of your overall financial strategy.
Why It Matters:
- Take time each year to revisit your life insurance policy to make sure it fits your life now.
- Know the exclusions of your policy before you agree to the terms.
- Know the important life insurance conversations to have in your life.