Getting life insurance might seem like a boring task, but at the same time it is quite important to pay attention to the fine print on your policy. Today we will guide you through 15 life insurance policy traps based on InsurEye consumer reviews and discussions with insurance expert Lorne Marr.
- Forgetting pre-conditions: That one is probably the most frequent issue. If you do not read and understand what qualifies as a precondition, your claim may be denied later when you need the benefit.
- Automatic renewals: Some policies may include a clause on automatic renewal but that might happen on higher rates, so make sure you know what your renewal conditions are. One of our reviewers reported an over 5x policy rate increase during automatic renewal.
- Partial years of dividends: Make sure you are clear on when dividends are paid on your policy. Some readers reported a case when dividends were paid on an annual basis without pro-rating. For one of our readers it meant loosing 11.5 months of dividends when a family member who had a policy for over 20 years did not make it to the full year of a policy before he died.
- Not filing a claim in time: This issue is related to disability insurance. Some of our reviewers report that their disability insurance claim was denied since they failed to file it in time. Thus, watch all the deadlines on your disability insurance policy.
- Payment frequency: Some insurance companies might be charging extra for paying insurance premiums monthly. While paying annually is not an option for everyone, it can result in some savings as opposed to paying monthly.
- Appointing irrevocable beneficiary: Should you choose to have an irrevocable beneficiary on your policy, it can backfire in the future. For example, in the case of a messy divorce, you cannot change the beneficiary without his or her signature.
- Working on contract: Yes, working on contract can be an issue for disability / loss of employment insurance even if it is a multi-year contract as opposed to full-time employment. Some InsurEye reviewers reported about insurers refusing coverage in these cases.
- Not being aware of benefits-lock interval: Many policies have an initial period when you will not get any benefits since you have just purchased a policy. That is done to prevent life insurance fraud.
- Two-year waiting period: Almost all guaranteed issue policies (such as some forms of non-medical life insurance) have a two-year waiting period. If the insured dies by a non-accidental death in the first two years of the policy, the death benefit is limited to a return-of-premium plus interest. Simplified issue policies (e.g. non-medical life insurance that has 3 to 12 health questions and no medical tests) can come with or without a two-year waiting period.
- Forgetting to mention extreme or dangerous sports: Read carefully what are considered extreme sports in your policy.
- Travelling to high-risk countries: Some countries might be more dangerous than others. You need to pay attention to which ones are excluded in your policy. Some jobs (journalist, installation specialist, etc) might require intensive travelling and therefore leave you without protection according to your policy’s fine print. Very often, countries with war-like conditions are excluded from the policy.
- Failing to disclose driving accidents: Failing to report serious incidents, like a DUI, might make your policy void if it comes out that an insurer issued a policy based on fraudulent data.
- Not being open about a job you do: Some jobs are more dangerous than others and might be excluded from the policy, such as a diving teacher or mine squad police officer.
- Guaranteed renewable or convertible policy: When getting a life insurance policy, make sure that it is a guaranteed renewable or convertible policy. Renewable policies can be renewed or extended for longer terms without a medical exam. Convertible policies mean that they can be converted into another type of insurance such as whole life.
- Life insurance vs. mortgage life insurance vs. accidental death life insurance: When buying an insurance policy, make sure to get a life insurance policy as opposed to any derivatives such as mortgage insurance (only pays outstanding mortgage debt in case of the insured’s death) or accidental death life insurance (only pays if the insured dies in an accident which is far less probable than dying because of a critical illness or other health-related issues)
As you can see, many life insurance policies and its derivatives such as e.g. insurance to cover funeral expenses, can be tricky and some policy traps can be recognized only via an experienced person. For their input on this article, InsurEye thanks Lorne Marr from LSM Insurance, an expert who knows all ins and outs of life insurance.
If you wish to connect with Lorne and receive guidance from him or his team members, please feel free to fill in the form on the right. Lorne is frequent contributor to different Canadian personal finance and insurance publications. His insights are regularly published in media outlets such as the Toronto Star, National Post, Globe and Mail, and MoneySense.