What are policy exclusions and why do they matter? Life insurance policy exclusions are important to familiarize with as you search for the right insurance provider and coverage.
When you buy life insurance, you are entering into a contract with your insurer. As with all contracts, there are terms and conditions which govern the behavior of your policy. It is always a good practice to read through your policy to ensure that you are aware of and understand the impacts of the various provisions that are outlined in your policy. Your agent can help answer any questions.
One of the important items that you will want to look for are coverage “exclusions”. These are important as they restrict the coverage that may be available to you.
Exclusions limit your coverage
Exclusions are a way for the Insurer to manage certain types of risk that would otherwise be difficult to price or very expensive to cover. Although an exclusion limits your coverage, it also helps to ensure that you are able to secure coverage at a reasonable price for other risks which are not specifically excluded.
At one time, it was common to find a wide variety of exclusions either in the policy language (applicable to all policy holders) or added to your policy for the unique risks which you present on your application. Over the years, Insurance Companies have generally reduced the number of exclusions appearing in the policy itself (and applicable to all policy holders) but have preserved the use of exclusions that reflect your individual risk (i.e. sky diving or hazardous occupations).
As always it’s important to review your policy to understand what it does and does not cover.
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Types of policy exclusions
As we noted above, there are exclusions that are part of the policy language and applicable to all policy holders (we will call these common exclusions) and there are those exclusions that are added to your policy due to the unique risks that you present on your application (we will call these individual exclusions).
The most frequently encountered common exclusion is the suicide exclusion which limits the payment of death benefit associated with this cause of death in the first two years of the policy (may differ in your state, check your policy). In circumstances where this exclusion applies, the Insurer will not pay the death benefit, but will return the premium paid into the policy.
At one time, it was not uncommon for an Insurer to include an exclusion for acts of war; however, that practice is quite rare now.
Individual exclusions are an interesting topic of discussion as they are as many and as varied as our modern jobs and hobbies.
Insurers will typically issue a policy with an individual exclusion if it proves to be difficult to price the magnitude or uncertainty of the risk. An example of this is the extreme sport of Wing suiting.
This a sport where folks wear a specialized suit that allows them to glide through the air often in close proximity to immovable objects such as mountain sides. They typically end their flight using a parachute while still at a safe altitude.
The risks are obvious but the newness of the sport and the very small number of participants limits the amount of data available to evaluate and credibly price the risk. So, rather than declining this risk outright, an Insurer may offer to exclude this activity from coverage.
Where an Insurer can price the risk, they will often offer the applicant the alternative of paying an extra cost for full coverage (typically expressed as an extra cost per unit of coverage; example: $5.00/$1,000 of coverage) or alternately, they can choose to exclude the specified risk and pay only for what is covered.
Among the types of individual exclusions that Insurers commonly use are: Aviation (piloting and crew, not passenger), avocation (i.e. hazardous or extreme sports) and occupation (i.e. construction or logging.)
In summary, policy exclusions are something that every policy holder should familiarize themselves with as they can (if present) have a meaningful impact on your coverage. The “silver lining” is that, in certain situations, the use of exclusinos can improve access to coverage and keep coverage affordable.