KEY WORDS
II. THE STUDY OF LIFE INSURANCE PRODUCTSINSURANCE PRODUCTS
2. The development of life insurance products takes us in the direction that the former complementary function of life insurance, long term saving is becoming
4.3. Introducing the Most Important Life Insurances
4.3.9. Complementary Risks – Insurance Riders
Life insurance is very often sold with coverage provided also for the following risks:
accidental death,
accidental disability,
certain “critical illnesses” or “dread diseases”,
disability,
surgery,
hospitalisation.
The death of the householder always causes financial difficulties. These difficulties can appear in a cumulative way if the death was unexpected, due to an accident. This way in these cases the insurer offers a supplemental cover beside the “normal” death sum insured, if the cause of death was accident. Accidental death usually means a sudden, outside effect71 independent of the insured’s intention, that causes the insured to die within a year. The accidental death sum insured is unusually 1-2-3-times the “normal” death sum insured, with the restriction that the insured sets an upper limit on this sum.
Accidental disability insurance is usually sold independently and also as a rider to life insurance. In insurance companies offering independent accidental death coverage, the accidental death risk is not included in accidental disability, while the insurer that doesn’t sell accidental death as independent coverage, includes this risk in the accidental disability coverage. If accidental death and disability are separate insurances, the insurer has to pay attention to the following rules:
71 Usually not including death caused by overstrain from lifting, sprain, freezing, sunstroke or heat-stroke.
These are border-line cases from the angle of intended-unintended, and that is why they potentially make it possible to abuse the policy, so the insurers prefers to exclude them explicitly making the situation unambiguous.
Accidental disability cannot be offered without an accidental death coverage (but it can be offered the other way around).72
The accidental death sum insured cannot be lower than the benefit payable in case of 100% accidental disability (it would not be too easy to sew the insured for part of the sum paid for 100% disability if he dies within a year after the accident).
The covered term of accidental death cannot be shorter than the term of the accidental disability cover, and the accidental death cover cannot be ended sooner than the accidental disability cover.
The definition of accidental disability is quite similar to that of the accidental death:
accidental disability means that the insured suffers severe and permanent deterioration of health caused by a sudden, outside effect independent from the insured’s intention, within one year. (sunstroke, etc. is usually excluded from the definition here also.)
The level of permanent health deterioration is determined by the insurer’s doctor. The
“table of injuries” or – after the common German terminology – “gliedertaxe”, that is part of the insurance terms and conditions helps him in this. This enumerates the most common losses of body parts and functions. Individual insurance companies might use different percentages, but they usually work with very similar tables. The table of injuries measures a kind of general health deterioration. It doesn’t take into account that the body-parts, capabilities (e.g. because of his occupation) of the given insured might be more important than generally for most of the people (e.g. the fingers for a surgeon, a piano player). If someone requires coverage for such special risks, he has to take out an individual accident insurance.
72 It is interesting that when I teach this rule to people actively practicing in the insurance business, there are always a few who argue on this rule, saying that the accidental disability benefit is payable while the insured is alive, and has the function of facilitating the insured’s further life, while the accidental death benefit has a principally different function, as it goes to the dependents. It can easily be imagined that someone doesn’t have dependants to provide for, so it is unnecessary for him to purchase the accidental death coverage. This is an acceptable train of thought, but it doesn’t count with the fact that after an accident the formation of the final level of disability or death is a gradual process. According to this, there might be several benefit payments (because of the disability becoming more severe), and it is not too purposeful to sue for repayment. The problem doesn’t have a clear solution, but it is wiser to take the points of the insurer into account here.
An example of the gliedertaxe73:
Injuries of body-parts Degree of disability
Total loss or loss of function of one of the upper limbs from the
shoulder joint 70%
Total loss or loss of function of one of the upper limbs above
the elbow joint 65%
Total loss or loss of function of one of the upper limbs below the elbow joint or the total loss or loss of function of a hand 60%
Total loss or loss of function of a thumb 20%
Total loss or loss of function of an index finger 10%
Total loss or loss of function of any other finger 5%
Total loss or loss of function of one of the lower limbs above
the middle of the thigh 70%
Total loss or loss of function of one of the lower limbs up to the
middle of the thigh 70%
Total loss or loss of function of one of the upper limbs below the elbow joint or the total loss or loss of function of a hand 50%
Total loss or loss of function of a foot at the level of the ankle 30%
Total loss or loss of function of a big toe 5%
Total loss or loss of function of any other toe 2%
Loss of the sight of both eyes 100%
Loss of the sight of one eye 35%
Loss of the sight of one eye if the insured has lost the sight of the other eye previously to the insured event 65%
Total loss of ability to talk 60%
Total loss of ability to smell 10%
Total loss of ability to taste 5%
Table 4.1.: Table of accidental injuries
Under the term health insurance we usually mean accident or sickness insurance. It primarily has insurance technical causes that the uniform health insurance is divided into two categories. Accident insurance – as we have seen – is under all circumstance an insurable risk. This cannot be stated of most of sicknesses, the auto-selection and moral
73 This was used by the former ABN-AMRO Insurance Company.
risk is too strong. But this is not true for some sicknesses, that – we can say – behave in an accident-like way. Insurers should offer cover against the sicknesses that satisfy all of the following criteria:
they appear in relatively rare instances,
people know them well and are afraid of them,
they would do anything to avoid them,
if they happen, they cause significant financial consequences.
These illnesses are called by an overall term “Dread Diseases”. (Instead of this name the term “critical illness” is becoming more frequent nowadays.)
Dread diseases are defined differently from insurer to insurer, but the following usually belong to the insured circle everywhere:
heart attack,
stroke,
cancer,
the need for artery-bypass operation,
kidney failure.
With such a cover, if one of the sicknesses in the policy terms and conditions is diagnosed in the insured, then the insurer pays a sum (which serves the purpose that the insured can finance the treatment of the given illness), independent from the other benefits, or the benefit payment (or a part of it) of the life insurance – that was the main policy of the dread disease rider – is brought forward.
Severe disability is a case, when the insured (if he is at the same time the policyholder) cannot necessarily continue the premium payment of the life insurance, while he still needs the coverage it provides. In case of traditional insurances the disability waiver of premium cover or rider solves this problem. According to this insurance, if the insured becomes severely disabled during the (premium) term of the main policy, then the risk community takes over further premium payments (so the main policy becomes paid up for him). The paid up term is usually the remaining term of the main policy (or, naturally the period until the earlier possible death of the insured), but sometimes the insurer declares that if the state of the insured should get better, the premium payment might be restored.
Disability is usually considered severe by the policy terms and conditions if it is 67%
caused by accident, or 100% caused by illness. In Hungary there is no coverage offered for disability of lower degree.74 The social security distinguishes two types of 100%
74 At the beginning of the ‘90s 67% disability caused by illness (in other words – using the categories was used then – category III. disability of the social security system – the first two denoted the two degree of the 100% disability) was also part of the coverage, but it has been left out due to the numerous cases of frauds. 67% disability in Hungary seems to be too subjective and can be manipulated too much.
disabilities caused by illness, and this practice is generally taken over by the private insurers, moreover they tie the benefit payment to the declaration of the disability by the social security institute. The difference between these two types is that while the lower degree fokú 100% disabled is able to take basic care of himself, the upper degre 100%
disabled needs care in the everyday life.
Premium payment in modern insurances (primarily the unit linked insurance) is not as well defined as in case of traditional insurances, this way the benefit of the disability waiver of premium also cannot be well defined. This problem can be solved if we realize that the disability waiver of premium is implicitly an annuity insurance, namely a conditional annuity that begins with the disability and has an annuity payment equal to the premium of the life insurance. This implicit annuity can be made explicit and then we get a disability annuity rider that is practically the same as the disability waiver of premium rider. This can serve primarily in case of unit linked the same function (naturally it can be taken out as a rider of traditional insurance, also) as the disability waiver of premium rider by traditional insurances, but it can also be made an independent benefit. But insurers don’t really like this, because they are still afraid of the disability risk “tamed” this way.
Beside the disability annuity insurance the most common sickness insurance ride in Hungary is:
surgery benefit and
hospitalisation daily allowance rider.
In case of the surgery benefit the insurer groups possible surgeries into categories of
“severity” (generally 5 categories), and if a surgery is performed on the insured, then a part of the sum insured of the surgery benefit rider is paid as a lump sum payment that corresponds to the category of severity of the surgery performed (e.g. 20% of the sum insured in case of category 1 and 100% of the sum insured in case of category 5). The goal of the insurance is to cover expenses arising in relation to the surgery.
If the insured is hospitalised, this also has costs, and are mainly proportional to the number of days spent in the hospital (loss of income, supplementary expenses,
“gratitude money”). The hospitalisation insurance rider satisfies the needs arising due to these, which has a benefit of a certain daily allowance (e.g. 5,000 Forints a day). This is usually not paid for short (3-5 days) hospital stays (saying that the financial needs are not as demanding, and the costs of handling the claim would exceed the degree of benefit payment), only if it is longer than this lower limit – usually with an upper limit also applied (e.g. 60, 180 or 365 days).