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Life Insurance Exclusions and Loadings

Russell Cain
Russell Cain Updated: 20 May 2020

Sometimes the only way you can get life insurance is with an exclusion or premium loading.

When receiving your life insurance quote, you see that a loading or exclusion has been applied to your policy, affecting either your cover, your premium price, or both.

For insurance companies, denying life insurance coverage, either completely or temporarily, is always the last resort. Fortunately, there are various alternatives available to assist them.

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An insurer may give you two options to compensate for a medical condition, serious family history or dangerous sport or occupation.

  1. To accept an insurance loading or
  2. Take out the policy with a life insurance exclusion.

Any exclusions and loadings applied to your policy will be outlined for you in your policy documents and Product Disclosure Statement (PDS).

If you currently have a life insurance exclusion or loading, you might want to compare quotes from other leading insurers because every insurer has their own underwriting guidelines. Even though one company might charge you more or exclude a favourite past-time, another could potentially offer you standard rates and full coverage.

What is an exclusion in insurance?

A life insurance exclusion generally refers to an occurrence or situation where an insurer won’t pay a claim due to the level of risk associated with such an event. For example, most insurers will not pay a death benefit if caused by suicide within the first 12 to 24 months of your policy commencing, depending on the insurer.

Often a life insurance exclusion will be offered concerning non-medical conditions. For example, a client who participates in motor racing may be given the choice of excluding that activity from the cover.

Fortunately, in many cases, you can request that your insurer review your policy exclusions after 12 months from starting your policy.

The purpose of life insurance exclusions

The goal of insurance exclusions or limitations is so that the insurer can protect themselves against risks so significant that it’s beyond their risk appetite or in cases where the data isn’t available to calculate a loading to compensate for the risk. For example, if you are an avid skydiver, rather than denying you a life insurance policy, the insurer may decide to apply a skydiving exclusion.

How are term life insurance exclusions decided?

A term life insurance exclusion is generally determined by the information you’ve provided during application time. This might include information about your age gender, occupation, hobbies, and whether you’re a smoker or not. Your insurer reviews this information using their specific guidelines, and then determines whether there are any risks they are not willing to provide cover for.

The two types of term life exclusions

  1. General exclusions
    Outright exclusions that are written in all life insurance plans and which apply to everyone, such as claims related to criminal activity.
  2. Specific exclusions
    These exclusions are dependent on the particular insurer’s underwriting guidelines and the insured person’s lifestyle, medical history, and overall risk level.

What is a premium loading in life insurance and how does it affect my cover?

An insurance loading definition usually refers to the extra cost that’s added to a premium to cover the higher than anticipated risk from insuring a person that is statistically more likely to claim. A premium loading is generally applied when a life insurer believes that your health condition, occupation or hobby might result in a higher than average chance of having to pay a benefit.

For example, people who smoke, have a pre-existing medical condition, or a dangerous occupation might have a loading placed onto their policy.

From an insurers perspective, a life insurance loading is always preferable to excluding a risk event, or at worst, declining cover altogether. Because a premium loading ensures you are fully covered for all instances, your policy was intended to provide. But it’s not always that simple in practice.

In these circumstances, a life insurance specialist would usually recommend that you opt for the unrestricted cover, accepting a life insurance loading rather than the exclusion. However, financial or other circumstances mean you may be compelled to take the exclusion option. Doing this could expose you to what may be a significant protection gap.

How to avoid the insurance protection gap

If loadings are prohibitive, there are two main ways to restructure your cover to reduce this protection gap.

  • First, reduce the amount of life coverand accept the loading on the lower amount.
  • Second, split the risk by having a proportion of the life cover loaded, and the remaining amount subject to the exclusion.

The choice of how the cover is structured is something that needs to be discussed with an insurance specialist and will obviously depend on your personal circumstances. But whatever the outcome, having some cover in place is undoubtedly much better than having none.

How is an insurance loading calculated?

During the application process, you’ll provide your prospective insurer with the requested personal information. From this information, your insurer will be able to deduce if there’s a higher chance that a claim will be made on the policy in the future.

The insurer will then use this probability to calculate an insurance loading in the form of a percentage that will be added to your premium price.

Case Study: Life Insurance Loading

Henry Langley is a 45-year-old smoker, with a history of high blood pressure and has applied for $1million worth of cover from a reputable life insurance company in Australia. Henry gets the shock of his life when his quote shows a substantially higher premium than expected.

The insurer has informed Mr Langley that because of his high blood pressure, combined with his smoking status he is at an increased risk of heart attack, stroke and many other health complications. Due to Henry’s higher than average risk profile the insurer has placed a 0.5 loading on his premium.

Henry will have to pay 0.5 times more for his premium than a 45-year-old, non-smoking male with normal blood pressure would have, all other things being equal.

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Top 10 most common reasons for life insurance exclusions and loadings

  1. Suicide and self-harm
    A claim related to suicide, and self-inflicted injuries will generally be excluded within 13 months of your policy commencing. Some insurers go so far as to exclude suicide up to two years. Once this period is complete, the exclusion is reassessed and usually lifted, depending on the insurer’s guidelines and policies.
  2. Drug and alcohol abuse
    Some insurers would not pay a benefit if the insured person’s death were due to alcohol or drug misuse.
  3. Criminal activity
    If a claim is the result of illegal activity, war or terrorism your life insurer might not pay out.
  4. Your medical history
    Your policy could exclude or limit coverage for specific medical conditions which you had before applying for life insurance; these are typically referred to as pre-existing medical conditions.1. Examples of health problems that could have a 12-month-waiting period attached include certain cancers, diabetes, high blood pressure and dementia.
  5. Your BMI
    If you have a higher than average Body Mass Index (BMI), your weight might classify as a pre-existing condition, and you could expect either an exclusion or premium loading for obese-related illnesses, such as a heart attack, sleep apnea and stroke.
  6. Dangerous occupation
    If you work in a high-risk profession, for example, in construction, or your job opens you up to specific hazards, like car accidents for taxi drivers, your policy may have an exclusion for claims related to these occupational risks.
  7. Travelling to high-risk destinations
    Insurers may exclude coverage when you travel to countries the government has advised are unsafe to visit.
  8. Gross recklessness and negligence
    This exclusion usually refers to things like driving dangerously or not taking proper safety precautions.
  9. Hazardous hobbies
    Some extreme sports and activities are considered particularly dangerous and may be excluded, such as bungee jumping, mountain climbing, and skydiving. However, select insurers do provide coverage for dangerous past-times by opting to apply a premium loading.
  10. Aviation
    Generally, insurance companies will pay a benefit if injury or death is because of a commercial plane crash. However, if the individual dies as a passenger in a private plane then some companies will not pay.

Frequently asked questions and answers

  • Can a life insurance policy exclusion be removed?

    Yes. All underwriters should be prepared to review exclusions and loadings. If you have returned to a standard risk as a result of medical treatment, or after having ceased a hazardous occupation or pastime, favourable consideration should be given to removing the exclusion.

    Generally, the insurer will want to see a period of time where you have been entirely free of symptoms and be satisfied that the condition has stabilised to the extent that the original decision can be modified.

    In the case of non-medical exclusions, the life insurance company will need to be convinced that you have permanently ceased the activity, and there is no likelihood of them taking it up again.

    In some circumstances, it may be difficult to come to this conclusion because of various factors. But whatever the situation, the insurer should work with you to position the reasoning for the decision so that the policy is not at risk of being cancelled (e.g. by agreeing to defer the decision until certain criteria are met).
  • Can a premium loading be removed or reduced later?

    Yes, you can usually request that a life insurance loading is reviewed after having your policy for about 12 months. However, this is generally dependent on the reason for the loading and the insurer you chose to buy cover from.
  • Do I have a choice between a loading or an exclusion?

    Whether you’ll have a choice between either loading or exclusion is dependent on the insurer and their underwriting guidelines. However, it is usually better to have cover for all eventualities, even if you must pay a bit more, than having no protection at all. Of course, this is also dependent on your personal circumstances and budget.
  • Why is life insurance coverage sometimes deferred or declined?

    In some extreme circumstances, an exclusion is a not a suitable option for the insurance company to offer, and the cover must be deferred or declined outright.

    This is often because the wording for an exclusion must be well defined, as it may form the basis for the assessment of a future claim against the policy. Accordingly, the offering of an exclusion is limited to situations where a medical (or occupational/pastime) condition can be unambiguously isolated and identified.

    For example, exclusions are particularly useful for musculoskeletal conditions (such as a knee injury). But they’re less efficient for systemic medical conditions such as severe diabetes, where a claimable complication could include blindness, kidney problems or peripheral vascular disease.

    Life insurance companies in Australia usually try to avoid deferring or declining an application, leaving it as a last resort. Every effort is made by Australian insurers to try and offer non-standard risk cover with a loading or exclusion wherever possible.

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