Insurance: 5 warning signs you may have improper insurance

Posted by on July 16, 2009 in insurance

Insurance is the transfer of risk from one party to another. In consideration of  monetary payment by the insured, the insurer promises to pay compensation based on some future risk/loss, such as disability or death, to a designated party. In and of itself, the concept of insurance is great. Who does not want a risk management tool that shifts your risk to someone else?

However, the devil is in the details and there are two larger and worrying trends in the insurance industry. The first is that insurance companies don’t want to be boring old insurers anymore but asset managers. The second is a general consolidation of the industry. In Canada, three insurers- Manulife, Great-West Life and Sun Life- now control approximately 65% of the market. In the United States, companies dominant insurance niches. While the public opposes big banks, the insurers quietly reached a scale the banks would die for.

The result is that most insurance companies need to pay out as little as possible to maintain or grow their assets under management (in fact, many insurers sell policies as loss leaders while making money on asset management) and a consolidated industry means pricing power. Neither is particularly  good for the consumer.

On a more specific level, what are 5 warning signs that you may have an improper insurance policy?

1. No medical required before obtaining an insurance policy

Four Pillars and I  have written before about post-claim underwriting. While illegal in many jurisdictions, there are many ways to re-characterize a policy to be potentially within the scope of the legislation (and require expensive litigation to resolve).

A “no medical required” insurance underwriting process may not indicate per se that you are subject to post-claim underwriting but it could be a warning sign you could be sold a policy subject to post-claim underwriting. It may make the process of obtaining insurance easier but the potential future-risk is greater.

2. The purpose of insurance is not being used for risk management

As reported by Riscario Insider, the 10/8 program, which involves using insurance policies as collateral towards a loan to the policy-holder to be used for business or investing purpose (thus making the interest tax deductible), is being reviewed by CRA.

Depending on the specifics, some insurance policies were designed more as tax shelters than insurance. In such cases, the insured could run audit risk for what is supposed to be a risk management tool.

While no one knows what will happen to the 10/8 program (and you know there is too much money at stake not to have the insurance company fight this out), the larger point to consider is why you are entering into an insurance contract. If you are being sold something who’s primary purpose is not risk management then think twice since you have opened yourself to other risk factors.

3. Watch the exclusions

Insurance policies are drafted to set out what it does not cover rather than what it does. Just because it is called critical illness insurance, does not mean all type of critical illness are covered and if you have a family history of certain critical illness, the insurer could deny you on the grounds you failed to disclose a pre-existing condition.

The point is to ask your insurance broker what the policy does NOT cover as well as covers so you understand the limitations of your policy. If you may possibly fall under an exclusion, then the policy is not right for you.

4. Unnecessary insurance

Life insurance for minor children. Mortgage insurance. Credit balance insurance. Flood insurance for someone living in North Dakota. There are a lot of insurance products that are ideal for a small subset of the population but sold to everyone. The fundamental question to be asked is always: (i) am I actually at risk (chances of a minor child dying are slim; and (ii) does the risk of occurrence actually require transfer of such risk (a minor child has no dependents so who really needs the money on death?)?

5. Too much insurance

This one is always tricky but insurance brokers tend to start high on their coverage (for their commission). The question to be asked is always: how much money do I really need in case something happens to me? This requires some cash flow projections based on your own life-style rather than what the insurance company tells you.

3 Comments on Insurance: 5 warning signs you may have improper insurance

By jack on July 16, 2009 at 11:05 am

READ THE CONTRACT, I had a friend who was paying into a life insurance for the purpose of cancer or stroke as it runs in the family..he didnt bother reading the contract and just found out that his policy dosent cover either of those issues..he is 33 now and has been paying into this for over 10 years at $50/m…READ THE CONTRACT, taking the word of the person you are dealing with is bad biz, those days are over..if the contract is too complex..take it to a lawyer.

By Eric on July 17, 2009 at 12:00 pm

Insurance for kids makes sense, if it is done right. If it is very cheap term, it helps with burial costs. Most young parents can’t cough up $15-$20K for a funeral, but they can manage a few bucks a month. Also, permanent policies on kids are a great way to secure insurability, transfer wealth across generations, and secure affordable permanent coverage for their inevitable final expenses and estate needs.

Otherwise a good article.

By Jerry on July 17, 2009 at 5:04 pm

Jack has a point… if you take the time to read the insurance contract, you can avoid many of these pitfalls. If you do not understand them, have SOMEONE ELSE (not the agent) explain them to you before you sign. This will lead to fewer problems down the road. I can see two sides to Eric’s argument, but if it isn’t too much to add on to a policy then it might be worthwhile.

Write a Comment on Insurance: 5 warning signs you may have improper insurance


Follow comments by subscribing to the Insurance: 5 warning signs you may have improper insurance Comments RSS feed.


Read more posts by