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Things we need to change in the life insurance industry

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Here’s my top 5 list of things that I believe regulators need to change in the life insurance insurance industry.

1) Remove the fraud exclusion from life insurance policies. Right now Canadian life insurance policies state that life insurance claims can be denied in the first two years of the policy based on failure to disclose. After two years they can only deny claims based on fraud. Fair enough? Well, that depends on your definition of fraud. You probably think it means willful and malicious deception. What if the insurance industry uses a different definition of fraud (Oh, and they do)? Counterpoint – American life insurance policies do not have this fraud exclusion. In fact, Canadian insurance associations have been asked/advised to take this up and declined to do so. It’s a non-issue in the industry other than with a couple of life insurance radicals such as myself.
2) Require regulatory oversight on all claim denials. Right now life companies can call ‘fraud’ or ‘Yeah! It’s claims-denial day’ whenever they wish, and simply deny the claim. Consumers are now on the defensive, they have to hire and pay lawyers to take the company to court in order to get the claim paid. (I’m staying technical here, but think about how your spouse would feel about this after your death.) We should have a requirement of regulatory pre-approval on all claims denials. If companies want to deny a claim, require that they prove it to regulators first. Put the companies on the defensive first. Companies won’t go for this unfortunately, and consumers have little voice to promote this level of protection at the regulatory level.
3) Require self insured disability plans to have the same reserve or reinsurance requirements as an insurer. In short, if your company is going to ‘save money on insurance’ by looking after their own plan, then hold them to the same protection requirements as life companies. This loophole was exposed when Nortel when bankrupt. Nortel had their own disability plan which effectively went bankrupt at the same time as the company did. Requiring reserve or reinsurance requirements protects consumers in the event of bankruptcy of the company.
4) Require disclosure of licensing of advisors. I’m licensed to sell life insurance, but I have access to products that could make me look like a mutual fund salesperson. It should be clear to consumers if they’re working with insurance products masquerading as investments as opposed to straight investments. I believe consumers should be aware that I am only licensed for life insurance products, and am not licensed to sell traditional mutual funds.
5) 1035 transfers. Canadians can transfer funds from one RRSP or TFSA to another, without taxation. And why not? Not so with life insurance. If you have investments inside a policy in Canada and want to move to another policy or company, you have to collapse your policy, pay taxes and start all over again. This creates an anti-competitive market where once a client has purchased an insurance policy with investments, they’re locked in unless they want to pay taxes. In the U.S., consumers can use a form called a ‘1035 transfer’ to move investments from one universal life policy to another. This fosters a competitive environment, to the benefit of consumers.

Wrongful or criminal deception intended to result in financial or personal gain.

Also known as a “living benefit rider”, an accelerated death benefit is a rider that can be added to a life insurance policy. It allows the policy holder to access part of their policy death benefit if they have been diagnosed with a terminal illness. The funds are typically used for medical treatment and care.

Accidental death and dismemberment (AD&D) is a rider that can be added to a life insurance policy. AD&D issues a benefit if the insured person dies accidentally or suffers from dismemberment, such as the loss of a limb or the loss of use of a body part.

Accrued interest is interest that has been generated from a life insurance policy but that has not yet been paid out to the policy holder.

Actual age is a method that life insurance providers use to calculate the age of a life insurance applicant. Using this method, your age is determined by your most recent birthday. Another method used is “nearest age”, which determines your age based on whatever birthday is closest to the present date.

Actuarial tables are vital to life insurance companies. Sometimes known as mortality tables, they indicate the statistical probability of death of people based on factors like life expectancy, age, gender, health, and more.

An administrative expense refers to a business expense that is not part of the company’s main operations, such as production and sales. Administration expenses include things like salaries, benefits, insurance, etc.

Adverse selection refers to when sellers and buyers do not have the same information, such as a salesperson knowing the value of a product is less than its cost. In life insurance, adverse selection can include when an applicant does not disclose relevant information to the insurance provider.

A life insurance agent is responsible for selling life insurance policies to people and working with clients to process life insurance claims. In contrast to a life insurance broker, an agent works on behalf of a life insurance company.

When naming a beneficiary for a life insurance policy, there is typically a primary beneficiary and an alternate (or contingent) beneficiary. An alternate beneficiary is the person who receives the policy’s death benefit if the primary beneficiary is unable to claim it.

Annual renewable term (ART) life insurance is a form of term life insurance that offers one-year coverage that can be renewed every year. Because premiums increase with every annual renewal, ART life insurance is best for short-term coverage needs.

An annuity is a financial strategy offered by banks and insurance companies that invests a customer’s money in order to generate an income stream down the line. Annuities are most commonly used to bolster retirement funds.

In the context of life insurance, an applicant is the person applying for life insurance coverage.

A life insurance assignment enables a policy holder to transfer control of their life insurance policy to a third party—typically a close relative.

An Attending Physician Statement (APS) is a document issued by life insurance companies that must be filled in by a physician, providing an overview of a life insurance applicant’s health and medical history.

An automatic premium loan is primarily associated with permanent life insurance policies with a cash value. It enables life insurance providers to deduct any outstanding premiums from the policy’s cash value.

On life insurance applications, you may come across the term avocation. An avocation is simply a hobby, or an activity outside of work that you participate in. Certain avocations can influence your life insurance premium rates.

Backdating is a strategy life insurance applicants can use to lower their premiums with life insurance companies that use your nearest birthday to determine your age. If you are 29.5 years old, you can use backdating to secure a premium for a 29-year-old. You just have to pay premiums for the months that elapsed from your insurance age being 29.

A beneficiary is the person (or entity) that is named on a life insurance policy that will receive the death benefit when the insured dies. Typically, a beneficiary is a spouse, dependent or close relative, though organizations can also be named as beneficiaries.

Burial insurance, also known as final expense insurance, is a type of whole life insurance policy with a modest benefit (usually under $25,000) that is intended to cover funeral and burial costs.

Capital gains tax is a tax paid on the profit generated when an investment is sold. If you terminate a permanent life insurance policy, you will pay capital gains on any income exceeding the policy’s adjusted cost base.

If you terminate a permanent life insurance policy after a set period of time, the life insurance provider will pay you a sum of money, the cash surrender value. This amount is the cash value of the life insurance policy minus any surrender and administration fees.

Cash value life insurance refers to a type of permanent life insurance that comes with a cash value. The cash value increases over time as the policy holder pays into their policy and can be used as collateral for loans or to cover premiums.

A child protection rider can be added to a term life insurance policy to extend coverage to your child or children. With a child protection rider, the policy holder will receive a small death benefit should their child die within the coverage period.

In the context of life insurance, a claim is a request submitted by a beneficiary to the insurance provider when the insured dies to release the death benefit. Essential documents required for a life insurance claim are a death certificate, policy document, and claim form.

A collateral assignment is when a policy holder appoints a third party (usually a lender) as the primary beneficiary of their permanent life insurance policy in order to take out a loan.

In the life insurance industry, company ratings are carried out by independent groups and rank insurance providers based on their financial health. AM Best is one of the most popular online companies for life insurance company ratings.

Concealment refers to when a life insurance applicant does not divulge important information to the life insurance provider, including smoking status, health, avocations, and more. Concealment can lead to a terminated or voided life insurance policy.

A contestability period is a fraud-management clause in life insurance policies. It consists of a one or two-year period in which life insurance companies can review your coverage and deny potential claims.

A contingent beneficiary, also known as alternate beneficiary, is the person or entity who inherits a life insurance policy death benefit if the primary beneficiary can not longer claim it.

Conversion right, sometimes called conversion privilege, is a clause in group life insurance policies that lets the insured switch to an individual life insurance policy without having to undergo a medical exam and underwriting.

A convertible life insurance policy is a type of term life insurance that allows the policy holder to convert their coverage to a permanent life insurance policy without having to apply for a new policy.

In life insurance, coverage refers to the size of a policy. In other words, how much the death benefit is worth. A life insurance policy with $150,000 in coverage will issue a $150,000 death benefit if the insured dies within the coverage period.

A critical illness rider is an optional add-on for life insurance policies that pays out a tax-free lump sum if the insured is diagnosed with or suffers from a covered critical illness, such as a stroke or heart attack.


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