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Health insurance
Friday, February 1, 2008
Limiting benefits

Permanent health insurance (PHI) represents a very different underwrit¬ing proposition to ordinary life busi¬ness, as it is designed to replace in¬come during disability as opposed to after death.

On the medical side, the PHI underwriter is concerned with mor¬bidity as opposed to mortality.
Consequently, there are a number of impairments which would be ac¬ceptable at standard rates on a life contract, but which would require a rating or exclusion for PHI - for ex¬ample, back disorders or arthritis.
Medical information is, therefore, obtained more readily, particularly medical attendants’ reports.
Impairments that appear trivial can cause considerable disability, particularly when combined with certain occupations. For example, minor back problems may seriously jeopardise the chances of a manual worker performing his job.
With regard to occupation, the standard definition of disability cov¬ers inability “to follow own occupa¬tion and not following any other”.
The risk is usually dealt with by classifying occupations into four cate¬gories according to exposure to acci¬dent and health risks and the degree of manual work involved.
A category-1 occupation such as a clerk will warrant a standard pre¬mium, but a category-4 occupation such as a bricklayer will necessitate a fairly substantial extra premium. It is important that full details of the occupation are obtained at the underwriting stage and that vague titles are clarified.
Some occupations require an above ¬average degree of fitness, and a li¬cence may be required to continue working. In these situations an extra premium may not be appropriate; rather, it may be more prudent to change the definition of disability to “inability to follow own or any other occupation to which suited by experi¬ence or training”, or an even harsher “any occupation whatsoever”.
PHI is designed to replace income and alleviate hardship during dis¬ability, but there should still be a financial incentive to return to work. Therefore, all insurers impose a limi¬tation-of-benefit clause. The underwriter must ensure that the limitation-of-benefit applied for is appropriate, bearing in mind the limitation-of-benefit wording, com¬pared with the insured’s salary.
This can be achieved by relying on a test of reasonableness, bearing in mind the likely earnings from a particular occupation. Alternatively, some offices ask for details of salary on the proposal form.
Occasionally, an earnings statement covering the previous three years may be requested. Even more detailed financial evidence is required for bigger benefits, possibly even in the form of accounts.
Naturally, as benefits increase as a proportion of income, so does the incentive to claim. It is important, therefore, that the limitation-of-bene¬fit clause is assessed at the under¬writing stage, particularly as it can lead to considerable ill feeling if bene¬fits are restricted in the event of a claim.

Copyright © Insurance Times and Investments® Vol:21.1 1st February, 2008
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