Life in Canada

Insurance:

5 warning signs you may have improper insurance

Insurance is the transfer of risk from one party to another. In consideration of monetary payment by the insured, the insurer promises to pay compensation based on some future risk/loss, such as disability or death, to a designated party. In and of itself, the concept of insurance is great. Who does not want a risk management tool that shifts your risk to someone else?

However, the devil is in the details and there are two larger and worrying trends in the insurance industry. The first is that insurance companies don’t want to be boring old insurers anymore but asset managers. The second is a general consolidation of the industry. In Canada, three insurers- Manulife, Great-West Life and Sun Life- now control approximately 65% of the market. In the United States, companies dominant insurance niches. While the public opposes big banks, the insurers quietly reached a scale the banks would die for.
The result is that most insurance companies need to pay out as little as possible to maintain or grow their assets under management (in fact, many insurers sell policies as loss leaders while making money on asset management) and a consolidated industry means pricing power. Neither is particularly good for the consumer.
On a more specific level, what are 5 warning signs that you may have an improper insurance policy?

1. No medical required before obtaining an insurance policy
Four Pillars and I have written before about post-claim underwriting. While illegal in many jurisdictions, there are many ways to re-characterize a policy to be potentially within the scope of the legislation (and require expensive litigation to resolve).
A “no medical required” insurance underwriting process may not indicate per se that you are subject to post-claim underwriting but it could be a warning sign you could be sold a policy subject to post-claim underwriting. It may make the process of obtaining insurance easier but the potential future-risk is greater.

2. The purpose of insurance is not being used for risk management
As reported by Riscario Insider, the 10/8 program, which involves using insurance policies as collateral towards a loan to the policy-holder to be used for business or investing purpose (thus making the interest tax deductible), is being reviewed by CRA.
Depending on the specifics, some insurance policies were designed more as tax shelters than insurance. In such cases, the insured could run audit risk for what is supposed to be a risk management tool.
While no one knows what will happen to the 10/8 program (and you know there is too much money at stake not to have the insurance company fight this out), the larger point to consider is why you are entering into an insurance contract. If you are being sold something who’s primary purpose is not risk management then think twice since you have opened yourself to other risk factors.

3. Watch the exclusions
Insurance policies are drafted to set out what it does not cover rather than what it does. Just because it is called critical illness insurance, does not mean all type of critical illness are covered and if you have a family history of certain critical illness, the insurer could deny you on the grounds you failed to disclose a pre-existing condition.
The point is to ask your insurance broker what the policy does NOT cover as well as covers so you understand the limitations of your policy. If you may possibly fall under an exclusion, then the policy is not right for you.

4. Unnecessary insurance
Life insurance for minor children. Mortgage insurance. Credit balance insurance. Flood insurance etc. There are a lot of insurance products that are ideal for a small subset of the population but sold to everyone.

The fundamental question to be asked is always:
(i) am I actually at risk (chances of a minor child dying are slim; and

(ii) does the risk of occurrence actually require transfer of such risk (a minor child has no dependents so who really needs the money on death?)?

5. Too much insurance
This one is always tricky but insurance brokers tend to start high on their coverage (for their commission). The question to be asked is always: how much money do I really need in case something happens to me? This requires some cash flow projections based on your own life-style rather than what the insurance company tells you.

How do you attempt to avoid being caught in pre-existing condition trap? Some pre-existing condition denials occur simply because the policy-holder has not seen the doctor for a while and the insurance company is reviewing older documentation. The gap between the last medical visit and the commencement date of the policy could have incumbated a lot of medical conditions not disclosed. For policy holders who are more high risk, insurance companies do require a physical now as part of its due diligence.

But for what appears on paper to be less risky policy-holders, the insurance company may forgo this altogether (this was the case during good times but this may have changed) and by doing this really placed the risk onto you that you have a clean bill of health since your last visit. The moral of the story being get a physical as part of the process of obtaining insurance (if you are not required to already).

The second practical step is be honest and forthcoming and do it in writing. If an insurance company has on file a medical disclosure which may or may not be part of your medical records, it is more difficult to deny coverage.