Everything you need to know about exclusions, loading and indexing in life insurance
Term life insurance covers you in the event of death by paying a sum to your nominated beneficiaries. More comprehensive policies can also pay out for total and permanent disablement (TPD), temporary inability to work (income protection) and specific, named health events (trauma). When selecting a life insurance policy you should pay special attention to:
- Exclusions. The conditions under which your policy won't pay out.
- Loading. These are additional costs applied for particular reasons.
- Indexing. This is how much your policy keeps up with inflation.
This brief guide explains everything you need to know about loading, indexing and exclusions when choosing a life insurance policy, and how to adjust them to suit your needs.
To discover any exclusions which may apply, read the policy’s product disclosure statement (PDS). The insurer must mention all applicable exclusions in this document. These are the things not covered by your insurance policy, or conditions under which it will not pay out. In the case of life insurance, these might be certain activities, circumstances or health issues. Certain exclusions might only apply to particular components of the policy.
You should be able to find out all you need to know about exclusions by reading the PDS, but you can also contact the insurer’s customer service representatives for answers.
The two main types of exclusions are:
Found in most policies
- Suicide and self-harm. There is typically no payout for these if it happens within 13 months of taking out the policy.
- Criminal activity. Injuries or death which occur while doing anything illegal, or as a direct result of doing so, are not covered.
- Recklessness, negligence or unreasonable behaviour. Your policy should cover these in specific detail, but this category typically includes things like unsafe driving, failure to take proper safety precautions or follow warnings, or doing things which no reasonable person would have done, such as not seeking medical attention for an obviously severe health issue.
Applied to specific customers
- Dangerous jobs. If you have a high-risk occupation, an insurer might exclude injuries or death while at work.
- Risky hobbies. Some particularly risky activities like skydiving or mountain climbing may be excluded. This is sometimes done at the policyholder or insurer’s request.
- Occupational hazards. Specific, named hazards someone might encounter at their work, such as drowning for fishermen, needle-borne illnesses for doctors and nurses or car accidents for taxi drivers.
- Pre-existing conditions. If you have ongoing health conditions, or have previously survived an illness which might recur, then the insurer might apply a specific exclusion to it. For example, a person with diabetes might be able to get a life insurance policy at a standard price, but only if it specifically excludes all diabetes-related claims.
A loading is a percentage increase on the standard premium and/or excess. This is a relatively easy way for the insurer to adjust prices for high-risk customers who might otherwise be uninsurable, but is also generally applied to most policies to tailor the cost to your needs. Loadings are added if you are more likely than average to make a claim in the future. The following generally incur loading costs:
Indexing is how the different sums of money involved in a life insurance policy are adjusted to keep up with inflation and changing prices. Premiums are generally indexed according to:
- The Consumer Price Index (CPI). This is a measure of how the average prices of various goods and services change over time and vary between different regions for reasons like scarcity and inflation.
- Inflation index. What the level of inflation is, as a percentage change, in a given year.
Indexation can also be used as an option to ensure that the sum you are insured for will be adjusted for inflation. It can also be referred to as:
- Benefit indexation
- Indexation for inflation
- Inflation protection
Typically this is applied as a yearly increase in the amount you are insured for. Most insurers will apply indexation yearly at either the CPI or the inflation index, whichever is higher, up to a maximum of 5% per annum.
Inflation in a nutshell
Inflation is a term used to reflect price rises for goods and services in the economy that impacts your cost of living.
How is it measured?
The two main tools to measure goods and services are the Consumer Price Index (CPI) and the Retail Price Index (RPI).
The CPI is the preferred option as a measure for inflation, and different to the RPI, it doesn’t take into account most housing costs, like mortgage repayments and council costs.
Economists also use the CPI as an indicator for interest rate cuts or rises.
The way inflation hits your hip-pocket is simple. Let’s say you purchase a bottle of water for $3.00, and inflation for the year is 10%, the following year you will pay $3.10 for the same drink. Therefore, if your income hasn’t risen with the annual inflation, you won’t be able to buy as much of the same respective product. By the same token, if a life insurance sum does not increase with the rate of inflation then it may not be enough to cover the living expenses of your family in the future.
The effect of inflation on your money
The way inflation hits your hip-pocket is simple. Let’s say you purchase a bottle of water for $3.00, and inflation for the year is 10%, the following year you will pay $3.10 for the same drink.
Therefore, if your income hasn’t risen with the annual inflation, you won’t be able to buy as much of the same respective product.
By the same token, if a life insurance sum does not increase with the rate of inflation then it may not be enough to cover the living expenses of your family in the future.
Example: you take out a life insurance policy for $100,000 and the inflation rate is consistently 5%
|Indexation?||What happens to sum?|
|That $100,000 will increase to keep up with inflation, to the maximum of 5%. After a year your sum insured will have increased to $105,000. After several years it might have increased to more than $115,000.|
|You will still be insured for $100,000, but after a year it’s only worth the equivalent of $95,000 in terms of what it can actually buy. After a few years that $100,000 might be worth less than $85,000 in the year you took it out.|
Indexation for inflation is sometimes included in policies by default, but can also be added as an optional extra at an additional cost. It can make a huge difference for long-term policies, but less so for shorter time frames. If you policy is indexed for inflation, then your premiums will typically increase correspondingly each year, unless clearly stated otherwise.
Can loadings, exclusions and indexing be adjusted?
Yes. In some cases you may choose to do so, while other cases will involve them changing automatically. Some of the reasons your loading, exclusion and indexing may change include:
- If you have gotten a higher-risk job or taken up a dangerous new hobby since purchasing the policy. Because this affects your risk levels, you are required to report this information to your insurer. They will either apply a new loading or exclusion to compensate for this added risk.
- If you get older and your age group changes, putting you in a higher-risk category. This will affect your age loading.
- If your sum insured changes or you add new cover to your policy. Insurers typically let you change your policy to adapt to changing circumstances. If you do this, they will generally adjust loadings, exclusions and indexing accordingly.
Generally you will have some flexibility with loading, exclusions and indexing. If you want to make a change, or adjust the terms of a policy before taking it out, ask your insurer whether it’s possible. Many providers are happy to accommodate customers as long as they find the risk levels.