I recently met with a client and the topic of exclusions came up during our standard client review session.
What exactly is an exclusion? Well, without being overly technical, an exclusion on a life insurance policy is a waiver of sorts used to modify coverage for applicants considered to be sub-standard risks. Exclusions can be based on medical history, or even certain activities performed by the applicant.
Consider life insurance applicant Lyndsey Fergusson has put in an application for life insurance. Lyndsey is 27 years old, healthy as a horse, does not smoke and loves doing the yearly running of the bulls in Pamplona, Spain. In almost every way, Lyndsey is the perfect candidate for life insurance. She is young and healthy, so premiums will be low. She does not smoke, so she is less likely to suffer a stroke, therefore her premiums will be lower (unrated) than if she was a smoker. There is just one problem. Lyndsey’s choice of recreational activity (Pamplona Bull Run) automatically makes her a sub standard risk.
She could very likely get impaled by a bull and the company would have made a poor risk decision in insuring her with a standard policy. So what are the options available to the company underwriters?
Well, obviously the first option is that the company can flat out reject her application and choose not to insure Lyndsey. The second option which is really the topic of this post is that the company can agree to insure Lyndsey’s life but with an exclusion rider. The exclusion may be that the company would not pay out any death claim directly and/or indirectly related to Lyndsey’s “Pamplona Bull Run” activities. If a bull escapes the zoo and impales Lyndsey while she is walking down the street on her way to her office job, the death benefit would most certainly be paid, however if Lyndsey is impaled by a bull while at the “Pamplona Bull Run” as a participant, the death claim will be denied and her beneficiary will receive nothing. The good news is that Lyndsey can still get life insurance coverage, but with an exclusion on the policy.
The most common exclusion is the 2 year suicide clause. If the life insured commits suicide after two years, the life insurance policy will pay out. Suicide within the 2 year period, and there will be no benefit pay out. Of course, this assumes the insured answered the application questions honestly and did not leave out any pertinent details or intentionally mislead the insurer.
For more insurance or questions on life insurance and life insurance exclusions, call me directly at 647-233-5233.