Permanent health policies have a number of weaknesses, particularly for older people or those prone to ill health. We examine some of the policy conditions

Many readers will be insured under a permanent health policy in one form or another, either as individuals or through employers insuring directly with an insurance company.

The introduction of the permanent health insurance policy occurred some time between the late 1960s and early 1970s, when an insurer devised the first long-term, non-cancellable, sickness and accident policy.

This developed into the permanent sickness policy, that later metamorphosed into the permanent health contract that we know today.

The main reason for the long-term sickness and accident policy lies in the increasing weakness of the annual policy as time passes. In good health, an annual policy is a cheap option but, as age increases, so does the risk of sickness. For those unlucky enough to suffer a claim, renewal premiums will increase.

Given term
The net effect of what is effectively single-premium costing, is that those who need the cover most, such as older people with perhaps more liabilities and those who have already had a claim, are the least likely to be able to afford cover. Conversely, those least likely to claim, such as the young and those in good health, are the least likely to buy cover.

Today, the principle remains very similar to the original: that an individual effects a policy for a given term - often to retirement - and pays a level annual premium, which is commonly paid monthly. This is based on age at entry, sex, morbidity rates, state of health and occupation throughout the term of the contract. The premium rate may be reduced by a waiting or deferred period.

In this way, a young person can effect a long term policy knowing that, irrespective of his future health, cover will remain available.

Policies which are inflation linked or which may be increased by a fixed amount periodically are usual and allow for the sum insured to keep up fully or in part with the increased cost of living.

These premiums are generally for someone in perfect health irrespective of actual state of health.

Brokers will know (particularly those who have studied the subject in their CII exams) that the policy is non-cancellable by the insurer as long as the premium is paid.

Equally, regular readers of the Insurance Times CPD page will also know that we do not allow matters to rest as easy as that... there must be a learning point somewhere.

Policy conditions
One of the problems with the insurance industry is that we have never been particularly aggressive with insurers over old fashioned policy wordings and clauses. They are generally inserted by insurers to protect themselves and, over the years, they just grow in number and often in complexity.

The permanent health insurance policy is no different.

The CPD exercise this week is to obtain a copy of a permanent health policy, preferably your own, or one that might be used by your clients, and read the conditions carefully.

It is very likely that many of you will be looking at a policy that has another condition (other than premium payment) that allows the insurer to cancel cover, and that relates to change of occupation.

I have seen many wordings, but the most stringent stipulates that the insured person (or the policyholder, which may be different) must inform the underwriter (insurer) in writing if there is a change of occupation from that disclosed at inception, which may have been many years earlier.

What is interesting, and perhaps devastating, is that the insurer often retains the right to cancel the policy if this action is not carried out or, even worse, the policy is cancelled with immediate effect if this is not done.

Rigorous requirement
The wording itself does not stipulate that only more risky occupations have to be notified in writing. It simply says "if you engage in another occupation" or "change occupations".

The problem is that 30 years ago when the cover was first considered it was realised that a change to a higher-rated occupation could not be catered for in the initial premium rate and so the rigorous requirement of what is, in effect, a warranty was applied.

Imagine how you would feel if you or your client made a claim for long-term disability and were advised that the policy was void because the insured had changed occupation from insurance clerk with an insurance company to an account executive with an insurance broker 10 years ago.

Of course good market practice by the reputable permanent health insurers has been to rely only on the clause, if they have not been advised in writing of a more hazardous occupation. But in these less generous times, do we really want to rely on an underwriter being fair on a policy interpretation?

And talking of less generous times and with the whiff of redundancies in the air, perhaps we should also ask ourselves whether redundancy is a form of occupation?

Hopefully, as we are dealing here with the specific subject of individual permanent health policies the financial services insurance ombudsman will ensure that insurers do act fairly.

But, if you do find yourself looking at a permanent health policy with a "change of occupation" condition, perhaps it is safer to ensure that it is strictly adhered to.

The question this week is designed simply to make you think. What is an occupation? Is it:
a.A profession irrespective of the duties undertaken? For example, does an accountant who goes to work on an oil rig remain an accountant?

b.Relative to the insurer's class of occupation for rating purposes? For example, an accountant who moves from an office to an oil rig for three years changes from class 1 to class 2 occupation

c.A specific job, such as when an accountant in practice becomes finance director of a public company. Does he change occupation?

d.Paid employment?

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