Life insurers calculate the cost of a life, disability and severe illness policy you take out as an individual based on how it assesses the risk of you dying, being disabled or contracting a severe illness sooner or later.
The risk of dying or contracting a severe illness that may leave you disabled is affected by a number of risk factors such as your age or gender.
This means the cost of cover differs from one individual to another and the higher your risk to the insurer, the higher the premium you are charged. It is therefore important that the risks of insuring your life are correctly rated.
Many insurers use your individual rating factors to put you in a rate group. Everybody within that rate group then pays the same premium.
A newer approach that some insurers use is to quote each policyholder a unique premium based on your unique rating factors.
Life insurers use underwriters to assess your risk. Underwriters assess a number of factors that influence how they perceive your risk.
Factors used to assess risk
The factors that life insurers may take into account when assessing your risk, depending on how much underwriting there is and the benefits your policy offers, include the following:
1. Your age
Generally the younger you are, the cheaper your life insurance will be.
2. Your gender
Women, on average, live longer than men. Life insurers therefore generally charge women lower premiums than men, because, on average, women’s risk of dying at younger ages is lower than that of men.
|
Women are on average expected to live to 68-and-a-half. Living a healthy life can influence these odds and if your insurer can see evidence that you are healthier than average, it may offer you better premiums than those who are less healthy. Source: StatsSA Mid-year Population Estimates 2020 |
3. Your income
Your income is generally used together with your level of education to determine your socio-economic class. Generally a higher income means better access to healthcare, a healthier lifestyle, resources to overcome difficulties, and so on. This can improve your life expectancy.
4. Your level of education
Research shows that, on average, the higher the level of your education, the longer you are likely to live. This is because the more educated you are, the higher your income is likely to be and the greater your awareness of health issues is likely to be, leading to a healthier lifestyle.
5. Your occupation
Life insurers ask you about your occupation because your occupation is linked to your income-earning potential as well as risk. Life insurers assess whether your job is physically intensive or puts your life at risk. If you are a policeman or woman, or working underground in a mine, for example, your work is more physical and your life is more at risk than that of an accountant. If you are salesperson out on the road, your life is more at risk than that of an office worker.
If you are working outside of this country, your insurer may also consider the risk of the country in which you are working.
|
If a life insurer asks for very little information about your health and your family’s medical history, you are probably buying a limited underwriting policy. This means there is likely to be an exclusion from cover if you die from a medical condition related to pre-existing illnesses or conditions. This means that if you had a condition before you took out the policy and it causes your death, the life insurer may not pay out the benefit. When you apply for cover, life insurers ask you for permission to access your medical history. Should you die, the life insurer can then ask your doctors for your medical history and will quickly find out if you had been diagnosed or treated for any illness. Pre-existing condition exclusion clauses can leave your family without support after your death. The Ombudsman for Long-Term Insurance says among the complaints to its office, pre-existing exclusion clauses are the most common reason for denying claims. The ombudsman says life insurers often mistakenly place the burden of producing medical evidence about your medical history on your family member who is claiming on the policy. However, the ombudsman says, if an insurer wishes to rely on the pre-existing exclusion clause, the onus is on it to prove the existence of a medical condition that existed prior to inception of the policy. It is only if the information the insurer seeks is something only the claimant knows about that the claimant has to produce the information or evidence. Even then the onus of proof remains on the insurer. The ombudsman has also ruled in complaints that the insurer must prove that the condition led to the insured person’s death. So if you family member with a history of high blood pressure dies of a heart attack and the insurer refuses to pay because it says the pre-existing condition caused the heart attack, it must obtain medical evidence to prove the connection between the condition and the heart attack. |
6. Your smoker status
If you smoke, you are likely to die earlier than a non-smoker. The damage smoking can do to your health has life insurers setting premiums for smokers anywhere from 40 to 80% higher than those for a non-smoker of the same age, gender and other circumstances.
7. Your health
If your health is poor because you have a chronic condition that is not well managed, or you are overweight, a life insurer will regard you as having a higher risk of dying or suffering a severe illness at a younger age and will set your premiums higher. This is why your life company will ask a lot of questions about your health and possibly even send you for some tests.
Some conditions, such as back problems, may result in a higher premium for disability benefits, but not for life cover as it does not increase your chances of dying earlier.
8. Your family’s health
Your life insurer will ask about your family’s health because it needs to know if there are any illnesses in your family that are hereditary and which put you at risk.
9. Your sports or hobbies
If you are a pilot, a hang glider, hunter, base jumper, free diver or mountaineer, you may have to pay higher premiums. Alternatively, you could have a claim as a result of these activities excluded from your cover.
If you are involved in any extreme sports, you will probably have to declare as much and either your premiums will be higher or cover for your death or disability from participation in one of these “extreme” sports could be excluded.
Insurers need to ensure that any rating factors that are applied can be justified statistically. For example, if income is used to determine premiums, the impact of income on the associated risks needs to be justifiable statistically. This is referred to as fair discrimination.
In addition, fair discrimination should not infringe on an individual’s human rights. For example, even if it were statistically justifiable, race should not be used as a rating factor.
Other key issues that affect the cost of your cover
1. How much cover you take out
This is referred to as the sum insured. The more cover you want, the higher the premium.
Life cover of R1 million will cost you more than life cover of R250 000. But taking out four times more cover doesn’t mean you premium will be four times as much.
2. Accelerated or standalone cover
Whether cover such as disability and severe illness is accelerated life cover or if it stands alone – read What does it mean if my cover is accelerated or stand alone?
3. Cover increases
The increases in your cover and the level of any guarantees you enjoy on these increases – read Will my policy benefits keep up with inflation?
4. The term of your cover
Whether your cover is for a term or for life will also affect the cost - read Are life and disability policies really for life?
5. Whether benefits can be reinstated
Whether you can reinstate cover on a severe illness policy or on a life policy which has disability and/or severe illness benefits as an early pay out or accelerated benefit.
|
Listed life insurers make profits from the premiums they collect from you. These profits may be distributed to shareholders as dividends. As a policyholder, however, you do not share in these profits Mutual life insurers, however, do share their profits with the policyholders. |
TAKE NOTE
TAKE NOTE