‘Simplifying life insurance for financial planning clients’ by Jonathan Morris and Darren Lee published in FT Adviser

Research suggests that confusion around life insurance is one of the reasons fewer millennials are buying policies compared to previous generations. Long-winded questionnaires and the possibility of medical screenings add to the complexity.

It is important to help reluctant clients to feel more confident about taking out policies as part of vital financial protection. Below, an expert underwriter and insurance broker give their answers to some of the most commonly asked questions about how medical history, hobbies and medical screenings can affect life insurance premiums and some of the changes clients can make to their policy.

Medical history is an important part of assessing risk

Disclosing the details of health and lifestyle can feel daunting for some clients.

Clients will need to honestly answer a set of questions about their health to enable the insurer to assess their level of risk and ultimately decide the cost of the premiums. But more importantly for the client, an honest application will provide certainty of a pay out in the event of a claim.

1. Smoking

Broker: An insurer will consider an individual to be a smoker if they have used any of the following within the last 12 months. Even if this is only once during this period of time.

• Cigarettes
• Cigars
• Vapes or e-cigarettes
• Nicotine replacement products (patches, nasal sprays, or chewing gum).

Being considered a smoker will significantly increase the cost of the premiums that your client will pay for life insurance. For long-term cover (up to the age of 90 or Guaranteed Whole of Life), premiums could be double the cost of that of a non-smoker. For shorter-term cover up to age 60 or 70, premiums could be even higher – up to triple what a non-smoker might pay.

Some insurers however can remove or reduce the smoking loadings during the term of the policy if the client stops smoking.

2. Vaping

Underwriter: Although vaping may seem like a lower-risk option, it is a relatively new invention and therefore there isn’t long-term data about the potential damage it can do to health. People who have quit cigarettes but still vape are still more likely than those that have never smoked to use cigarettes again in the future.

3. What about people who are ex-smokers?

Underwriter: From a risk perspective, if the client used to be a smoker there is a chance that they will have already had some damage to their health. They also have an increased likelihood of becoming a smoker again compared to someone who has never smoked.

Even though they are no longer smoking, their premiums may still be higher than that of a lifelong non-smoker unless they have quit for a reasonable number of years.

Broker: The majority of insurers have introduced an ex-smoker loading for those who have used nicotine products within the last 5 years but have since stopped. So, it is always worth looking at the long-term projections of the policy premiums and how different insurers premiums maybe reduced in the future to obtain the best policy for the client.

4. History of drug use

Underwriter: If the client uses or has used recreational drugs in the past, this does increase the level of risk posed to the insurer. This is because the drugs could have damaged their health in ways that might not be immediately obvious and there is also the risk of accidental overdose with some drugs. Drug use also points to a more reckless personality type where there may also be increased risk from other causes such as accidents etc.

Broker: There is a huge variation in how different insurers approach drug use and ultimately to how they underwrite the policy. From previous cases we have seen a huge difference in the loadings applied from standard rates with one provider to a decline with another for exactly the same client. Therefore, it is a must to approach the whole market prior to the application to understand who is the best provider for your client’s circumstances.

5. Weekly alcohol intake

Underwriter: If the client drinks alcohol in moderation, it is unlikely to have an impact on premiums. But if they drink very regularly and/or in larger quantities, this is when the risk to health increases and premiums could therefore rise.

It is important to be accurate about reporting alcohol consumption when applying for life insurance. The questionnaire will usually ask how many units of alcohol your client consumes on a weekly or monthly basis. For context, a pint of lower-strength beer contains two units of alcohol whereas a higher-strength beer can be three units.

It is generally well understood that alcohol in large quantities or over a long period without any alcohol-free days can cause long term health issues (affecting not just the liver but other organs as well) and is therefore a higher risk for the insurers.

6. Cancer

Underwriter: This is a complex question because every cancer diagnosis is different and the detail is really important. A few things that can affect the level of risk include:

• The location and size of the tumour
• Whether the cancer has spread
• How long ago the client was diagnosed
• What grade the cancer was
• The treatment they are receiving or have received.

Insurers may differ significantly so shop around to find the right level of cover at the best price.

7. BMI

Underwriter: BMI is not a helpful measurement of health for everyone (e.g. high muscle mass) but generally speaking it provides a useful benchmark for overall health. For this reason, the client’s BMI will usually be taken into consideration by insurers alongside other measurements such as blood pressure, waist measurement and cholesterol levels to give an overall metabolic risk.

The higher the metabolic risk, the more chance there is that premiums will rise.

8. Diabetes

Underwriter: Diabetes affects multiple systems within the body and increases the risk of heart disease and problems with the kidneys, nervous system and eyesight. This means that there can be a range of different outcomes from an underwriting point of view. We hear a lot of people saying ‘’I have diabetes so I will not be able to get cover’’ but this is not strictly true. The main point of differentiation is how well the client’s condition is controlled and whether they are experiencing any complications. If well controlled and without multiple complications there is certainly the opportunity to obtain life cover in the market.

Application and Medical Underwriting

Depending on the client’s age and the level of cover they are applying for, the insurers may require GP reports and an up to date medical as part of their standard requirements.

1. How much does the medical cost?

Broker: The level of the medical screening varies depending on the client’s age at the time of application and the level of cover they are applying for. For larger sums assured, further blood tests and possibly an exercise echocardiogram (ECG) maybe required as part of the insurer’s standard medical requirements. Regardless of the cost, all fees incurred will be covered by the insurer.

2.What happens if the client’s health changes between the application and being placed on risk?

Underwriter: Your client is obliged to tell the insurer of any changes to their health up until the point when the policy is on risk. This may mean that the premium rises as a result, but neglecting to inform the insurer can lead to a policy being invalidated in the event of a claim.

A client’s hobbies can also affect their risk and the premiums they pay on life insurance

If your client enjoys taking part in hobbies or leisure activities that are considered risky, their premiums could be higher.

1. Will premiums be higher if the client enjoys an annual ski trip with their family?

Underwriter: Most companies will not charge extra for this, but skiing off-piste without a guide or heli-skiing can result in higher premiums. If your client takes part in high-risk hobbies, they will likely have an increased risk of accidents. They are also more likely to participate in other high-risk pastimes in the future.

Broker: Again, insurer’s underwriting philosophies differ significantly in regards to off-piste skiing or heli-skiing. If this is a hobby your client partakes in, it is important to shop around for the best value policy for the client.

For some clients, understanding more about how their policy works can help with their decision

1. How is medical data handled now and in the future if the client does not take out the policy?

Underwriter: Medical data is only viewed by parties who need to see it to be able to offer cover. Insurers all have their own secure data systems and take data protection extremely seriously.

If the policy does not proceed, then the data is deleted.

2.What changes can they make to the policy?

Broker: If needed, your client can:

• Reduce the term
• Reduce the sum assured
• Change the frequency of premium payments.

Life insurance policies can also be cancelled at any time without penalty, other than the loss of premiums already paid. If clients are thinking about cancelling a policy, it is always useful to speak to an adviser first to see whether this is the best decision or to see whether there are any alternatives or changes that could be made to make the policy more appropriate for them if their circumstances have changed.

3. What happens if a client misses a premium?

Broker: In the event of a premium being missed, your client has 30 days to pay from the premium due date or the policy will lapse. The client should receive a notification that a premium has been missed. Trying to get a policy back on risk once it has lapsed is very difficult. A lapsed policy often results in new cover needing to be applied for which will be more expensive, taking into consideration the clients increased age at the time and as it will need to be underwritten again any new health issues could also affect the terms of the policy.

 

Authors: Jonathan Morris, Senior Associate. Darren Lee, Head of Underwriting and Claims

Article published in FTAdviser in October 2023.