Getting life insurance can be a tricky task and it is very important to pay attention to the fine print on your policy. What’s written in tiny font can impact you in different ways, from increasing your premiums to even leaving you without benefits in case of an accident. Here are 10 life insurance policy fine print traps that you should be aware of:
- Trap #1 – Pre-conditions: If you do not mention existing pre-conditions (e.g. existing heart disease, surgeries in the past), your claim may be denied later when you need the insurance benefits. An insurance company will consider that you lied in order to benefit from lower premiums whereas an insurer had to carry a higher risk.
- Trap #2 – Mortgage protection insurance and accidental death life insurance: Try to avoid buying any special types of life insurance, such as mortgage protection insurance (covers outstanding mortgage debt in case of the insured’s death) or accidental death life insurance (offers coverage only if the insured dies in an accident; this case is far less probable than dying because of health-related issues). Mortgage protection insurance is a fascinating product created by lenders. Got a mortgage of $500,000 with mortgage protection insurance? It is actually better to get a large Traditional Life Insurance policy (e.g. Term) which will cover your mortgage payments and all other expenses that you would need to take care of (income for your family, payments for your kids’ college, funeral costs, etc.)
- Trap #3 – Renewal conditions: Some life insurance contracts can include an automatic renewal at higher rates. Pay attention to the renewal rates when buying an insurance policy. Insurers rely on statistics and may assume that, with time, your health condition gets worse (e.g. you getting older) and thus they somewhat “adjust” to that risk via higher premiums.
- Trap #4 – Extreme or dangerous sports: Some life insurance policies may decline coverage if you are involved (especially professionally) into extreme or dangerous sports. Read your policy twice if you are a fan of sky-diving or other dangerous sports. Chances of dying from mountain climbing is 1 in 1,750 whereas the same ratio for running and jogging or swimming is 1 in 1,000,000
- Trap #5 – Benefits lock (or “waiting period”): Almost all guaranteed issue life insurance policies include a 2-year waiting period. If you die by a non-accidental death in the initial 2 years of the policy, you will get back only your premiums and associated interest but not the benefits associated with your claim. The main reason for doing it to avoid insurance fraud.
- Trap #6 – High-risk countries: Your life insurance policy may exclude some countries if they are too dangerous (e.g. regional conflicts, wars, epidemics). Thus if your job requires travelling, you might have no coverage in those geographies. Make sure to read your policy’s foot print carefully.
- Trap #7 – Dangerous job: Are you working for a mine squad or Special Forces unit? Your insurer might exclude some dangerous jobs from its policy. For example, according to U.S. data for 2012, construction workers faced 17.4 deaths per 100,000 workers whereas loggers had 127.8 deaths per 100,000 workers making that job 7 times more dangerous than the previous one.
- Trap #8 – End of the policy: In order to avoid increasing life insurance rates when renewing your policy, consider a guaranteed renewable or convertible policy, which do not require a new medical exam or can be converted into another type of insurance.
- Trap #9 – Driving history: If you have not disclosed your serious driving incidents in the past (e.g. driving under influence), your coverage can be denied since an insurer may consider it insurance fraud in order to get lower insurance premiums. Dangerous driving in the eyes of an insurance company means more risk and thus will be associated with higher premiums
- Trap #10 – Payments: There might be a difference in premiums when choosing monthly payments vs. annual payments. If you can pay on the annual basis, your insurance rate can be lower. In comparison to monthly payments, annual payments save insurers administrative costs (e.g. distributing bills via post) and therefore they reward you with lower premiums.
Understanding life insurance policies requires some expertise. Make sure to use an experience life insurance broker when choosing your next life insurance or disability insurance policy.
Flickr: Laura Gilmore