Wednesday, January 2, 2013

Don't Blame the Messenger

Recently I saw an ad from AARP flogging the life insurance plan offered through their organization (but - and this is important - it is not offered by AARP itself). The ads mention that applicants need only complete "3 simple health question".  As I work for a company that offers life insurance, and I have extensive knowledge of the terms and conditions of our policies, I was curious what the questions are. 

A Google search yielded a result I found interesting at this site.  Sadly, on reading some of the complaints, I found that most of the complainants were clearly people who had not read their insurance policies and knew little or nothing about how insurance works. 

Several of them seem to think that if they terminated their policies, they would be refunded all the premiums they had paid.  If you find an insurance company that offers to refund your premiums when you cancel the policy, that company is either a) lying; or b) about to go out of business because they're not making enough money to cover their benefit payouts.  Insurance companies make money by charging premiums.  They have to charge enough to cover their reserves, the amount of money they set aside to cover insurance claims.  Their are state and federal regulations about how large these reserves must be.  But insurance companies also have to pay overhead: office space and equipment, salaries and benefits for their employees, advertising, etc.  If they are publicly-traded companies, they have to earn dividends for their stockholders.  To do all this, they have to charge enough premiums to earn more than what they need for reserves and overhead.  They have to balance the risk that they will earn more in premiums than they pay out in claims.  But they know that if premiums are too high, they won't get any new customers and their old customers will leave. 

One way life insurers manage this balancing act is by charging higher premiums to older policyholders, or to people who have dangerous health conditions.  These are the people who are mostly likely to die and incur a claim.  All of this is normal insurance industry practice, not anything illegal or immoral.  If the insurance companies never raised premiums for older insureds, they would have to charge all of their customers exorbitantly high rates. Others complainants on the site were incensed that premiums increased commensurate with the age of the insured person.  There were a few who blamed AARP for the perceived flaws in the plan, failing to recognize that AARP is not the insurer. I explained above why the rates go up.  AARP is not responsible for what's in the insurance policies, which are often by New York Life.  New York Life isn't preying on the elderly; it's just doing what it has to do to offer inexpensive life insurance to older people. 

The saddest part of all this for me was seeing that these unhappy people didn't read their insurance policies to learn the terms and conditions. Other ways that insurance companies can reduce premiums is by putting certain requirements in the policy.  For example, some policies require that if you are put in a care facility, there must be a resident physician on duty.  If there is not, and you die in such a facility, the policy will not pay any benefits.  It's important to know this stuff.  Not all insurance policies make this kind of requirement.  But having a requirement like this is another way the insurance company can save money, both for you and for the company.  They're not doing it just to be horrible to your relatives.  If you're aware of these limitations, you won't get an awful surprise when Grandpa dies in a nursing home (which don't usually have on-site doctors), and the insurance company declines to pay the claim. 

Seriously, people. read your insurance policy.  If you don't understand what it means, call the insurance company and make them explain it to you.  If they don't do that, then you have grounds to complain.  But be sure you're complaining about the right company.

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