Income Protection: The Three Strikes Rule

Whenever I think this I cannot help but imagine a baseball match. I sense the sports rulebook of three strikes and you are out of here!

What am I referring to? The often overlooked underwriting guidelines of many insurers that state that a client who has three exclusions placed on their Income Protection policy is an automatic decline of cover.

What constitutes an exclusion?

An exclusion is placed on a policy when an insurance provider feels that a clients health, pastime or occupation disclosure put them at a higher risk of claiming on the policy. This will mean that any claim placed on the policy will be rejected if the injury or illness is caused by the named exclusion.

Some examples of possible exclusions on an Income Protection policy:

• Health – depression, arthritis, back pain, deafness, blindness, neurological disorders
• Pastime – sailing, diving, private aviation, motor car racing, rock climbing
• Occupation – helicopter travel

A decline can come from any combination of three exclusions from the the three areas listed. You will tend to find that exclusions are mainly based upon health and pastime disclosures. Occupational exclusions are not as common as the insurer will often just outright decline the application if they are worried about occupational hazards.

Is this fair to the client?

Well that really depends upon the individual circumstances of each case. Where a client has three separate serious health conditions such as cancer, back trouble and stress/depression, a decline can sometimes be understandable. After all the Income Protection policy pays out upon an injury or illness that prevents the policyholder from working. If there are a number of existing medical conditions there is a greater likelihood that they may develop or offshoot into another illness that they could make a claim on and thus the insurer is likely to turn the plan down.

However, it is difficult to understand why a client who partakes in three different hazardous sports would be declined cover, rather than just having an exclusion on the policy for all of the named pastimes. Whilst the pastimes may be dangerous it is not as if the client does them 24 hours a day and not all at the same time.

Similarly if a client has a single health exclusion but takes part in scuba diving and sailing, their application would be declined. Why? Is this really fair to the client who is happy to take out cover with the exclusions on their pastimes? The client is ultimately left without any valuable protection.

What does this mean for me?

If you have had Income Protection declined due to this three exclusion rule there are a number of possibilities. There are a number of specialist insurance providers who will consider applications for Income Protection with multiple disclosures from the client. There is no guarantee that the application will be accepted, but there is a greater set of more lenient underwriting terms when needed. This could mean that the premiums for Income Protection are slightly higher than your standard insurer, but at least the client will have the vital cover they need!

Clients also have the opportunity to apply for the alternative of Accident, Sickness and Unemployment Cover (ASU). This policy will provide short-term income protection of between 12 and 24 months should you be unable to work due to injury, disability or involuntary redundancy. The advantage of this cover is that it is not medically underwritten so any existing health problems that a client would need to disclose for Income Protection, would not affect the acceptance or premium amount for ASU. That being said it is essential that those that take out this cover are fully aware that the policy will not pay out a claim that is related to an existing medical condition. So whilst the application is not medically underwritten, the claims process is.

Regardless of the reason we think that insurance providers should clarify their stance on the three exclusion decline rule more clearly. For some circumstances it is understandable, but there are many occasions where this simply seems extremely unfair to the client.