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Part 4: Funeral Insurance Debate: Measures clients can take to mitigate risk of policy lapse due to non-payment of premiums

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By Tose Gava


In my Part 3 blog: Traditional Funeral Insurance – A Mass Market Product That The Masses Do Not Understand, I focused on wide misconceptions by mass consumers on how insurance works with the view of helping an average policyholder manage their policy better for continuity of cover.

In Part 1 blog; Funeral Insurance Debate: Why Cash-Based Funeral Plans Are The Future, I weighed in on the new future where all funeral policies should be cash-denominated for reasons of sustained value for money and treating customers fairly.

I had also, previously in Part 2 blog: Traditional Funeral Insurance – A Focus on Embedded Structural Inefficiencies, extensively discussed fundamental issues relating to traditional funeral insurance’s in-built structural inefficiencies. The structural faults cost consumers and that should be corrected.

In this final blog of the series, Part 4 blog: Funeral Insurance: Measures Clients Can Take To Mitigate Risk of Policy Lapse Due To Non Payment of Premiums, I will try and educate policyholders on measures and options they can take to minimise risks of policy lapse or cancellation due failure to keep premiums up to date.

The main reason most policies are cancelled or lapsed resulting in loss of cover or claim repudiation is non-payment of premiums. Insurers understand that a policy-holder can have funding gaps or mismatches in their finances resulting in failure to always pay premiums on time. For reasons of treating customers fairly, insurers commonly allow grace periods ranging from, say a week to three months, for policies arrears to be regularised. This grace period gives the policyholder a window period to clear the arrears to avoid the policy being lapsed or cancelled.

To avoid losing one’s cover due to non-payment, there are measures that a policyholder can take, namely:

Waiver of premium If your insurer offers: Waiver of premium add-on to your policy, is always a very good benefit to buy. This is an additional insurance for the protection of the risk of failing to pay your monthly premium itself. The premium for the policy will be paid for by the insurance company after a pre-agreed deferment period if the policyholder is unable to work, either due to serious injury or critical illness.

However, as a type of add-on cover, also called a ‘rider’ benefit, waiver of premium is not a free benefit. When the benefit is available, the policyholder can opt in or out as it entails an additional amount, though marginal, on your monthly premium. The additional premium is basically the cost of ensuring the premium such that the insurer can pay your monthly premiums for you if you can’t work because you have become incapacitated. Not all insurance policies offer waiver of premium cover but where a given policy offers it, it’s always advisable to add it to your policy.

Protect Your Income To Avoid Non-Payment of Premiums: There are various reasons why policyholders may fail to pay their premiums resulting in policy lapse or cancellation. The most common reason being lack of income and this is mainly a consequence of one being incapacitated (accident/injury or sickness) or being made redundant. Unfortunate situations of Accident, Sickness and/or Unemployment result in loss of income but one can insure their income against any of these mishaps.

A policyholder can take a short-term (usually up to 24 months) income replacement called Accident, Sickness and/or Unemployment (ASU). With ASU, the policyholder gets protection against loss of monthly income in case you lose your job through redundancy or can’t work due to accident or sickness. The maximum benefit is usually half to two thirds of monthly income and benefits are not taxable.

It is possible to have Unemployment Cover as a standalone policy, and one can also have Accident & Sickness (Disability) Cover as a standalone policy. A longer income replacement policy is called Income Protection Insurance (IPI), also known as Permanent Health Insurance. IPI is an income replacement policy designed to provide an income when the policyholder is incapacitated and unable to work and earn a living due to ill health or accident.

IPI provides a regular income (weekly or monthly) to replace that which the insured may no longer be able to earn. IPI does not cover redundancy or unemployment. Usually, the policyholder can claim between 40 to 60% of their income and can claim until either of three things happens, that is, you are able to resume work, your policy term expires, you reach retirement age, or you die.

Pay Premiums in Advance: Where the insurance company allows and, if it is affordable, it may turn out to be a good strategy to keep your premiums paid-up in advance. Some insurance companies can allow the policyholder to pay up to a year in advance. This can act as a cushion if one is unable to pay their premiums on time in the future. If the policyholder was to hit some hard times, unemployment or sickness, it means they do not immediately lose their cover as the over-payment allows them time to recover and get back on track. In the event of a claim, the advance premiums will be refunded over and above the benefit pay-out.

Never Blank Out The Insurer – Always Communicate as a Policyholder: It is always important to communicate and keep your insurer updated in situations of difficulties especially premium arrears. The insurer can allow a grace period or agree to a payment plan provided the policyholder is forthcoming and committing to clear arrears. It is therefore recommended that you always reach out to the insurer so that a reasonable plan can be agreed in order that your policy is not lapsed or cancelled.

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Tose Gava is a UK Based Financial Advisor & Insurance Specialist; he writes in his personal capacity. He is contactable on sadctrader@gmail.com