Life insurance exclusions: What to look out for

Life insurance is designed to help soften the financial blow that hits some families after the loss of a loved one. Making sure the policy you choose has no unexpected exclusions can be crucial to ensuring the peace of mind and financial wellbeing of those you may leave behind.

If you are considering a life insurance policy, it’s likely because you are thinking about the value it could provide if you passed away and were no longer around to support your family and loved ones financially. Unless you decide to only take it out through your super, the process of setting up life insurance will typically involve an in-depth discussion between yourself and either the insurance provider or a financial adviser, who may act as a broker on your behalf.

With tips from both insurers and financial advisers who specialise in life insurance, Canstar explains what exclusions may apply to life insurance in Australia, and how you can seek to ensure you have sufficient cover for your situation.

What is life insurance?

Life insurance is a type of insurance policy designed to provide you and your family with financial security if you were to pass away, become terminally ill and/or disabled, or in some cases, if you become unable to work. Life insurance includes multiple different types of cover, which can be bought separately or bundled into one policy, depending on your circumstances and preferences.

Life cover: also known as ‘term life insurance’ or ‘death cover’, this type of policy pays a lump sum to your nominated beneficiaries (such as your partner or family members) in the event of your death, or if you are diagnosed with a terminal illness.
Trauma insurance cover: also known as ‘critical illness cover’, provides a lump sum of money if you are diagnosed with a specified illness, for example cancer, heart attack or a stroke.
Total and Permanent Disability (TPD) cover: provides a lump sum payment if you become totally and permanently disabled and are no longer able to work.
Income protection insurance: provides a benefit, usually paid monthly, to help replace a portion of your income if you are unable to work due to serious illness or injury.

What are common life insurance exclusions?

A life insurance exclusion is a risk or event that is not covered by a policy. In other words, if something is excluded from your policy, the insurer would not pay out a benefit in the event that your death, injury or illness is caused by or related to the excluded risk.

Insurers will generally determine any exclusions to your policy based on your answers to questions about your health and lifestyle during the application process, rather than applying blanket exclusions. For example, if you have a pre-existing health condition or work in a dangerous occupation, your cover may be limited.

One exception to this is in the case of suicide, which typically will not be covered by any life insurance policy for a period of time after the policy commences.

A spokesperson for insurer HBF advised Canstar: “Before issuing an HBF Ezicover Life Insurance policy, we ask customers some questions about their health and lifestyle and, based on the information we receive, we may include certain exclusions in the proposed policy.”

Gerry Baker, a director and life insurance expert at financial planning firm TAG Financial, puts the shift away from blanket exclusions down to a series of events triggered by the suffering of many Australians in the wake of the Bali terrorist bombings of 2002.

“Historical blanket exclusions such as death caused by war or warlike activities including terrorism, high-risk travel, alcohol and/or substance abuse, risky behaviours and criminal or illegal activity are no longer applied across the board,” Mr Baker told Canstar.

“The Bali bombings demonstrated how hard it was for insurance companies to enforce such exclusions and, as such, we began to see a change in how exclusions are determined for each individual policyholder. By removing exclusions that are very rarely enforced, insurers have been able to make their life insurance policies easier to understand and more customer-friendly.”

Why might an insurer refuse my life insurance claim?

The most common cause for refusing a life insurance claim is non-disclosure by a policyholder, according to Mr Baker. He recommends being as honest and transparent in your application answers as possible, to reduce the risk of a scenario where your loved ones are denied any payment from your life insurance policy.

“If you know you are going to be doing something such as regular travel to a risky destination, participating in a high-risk sport such as deep sea diving, or working in a high-risk profession, then it’s important to inform your insurer,” Mr Baker said.

“With accurate information, they can attach a proportionate level of risk to your policy, and you can have greater peace of mind that should anything happen, you’re covered. You are more likely to run into problems if you don’t disclose this information.”

Allianz advises it would not pay any benefits if the event that gives rise to a claim first occurs while in an overseas location, on a date where there is an Australian Government Level 3 (‘reconsider your need to travel’) or Level 4 (‘do not travel’) warning in place, or if the policyholder voluntarily remains in an overseas location when the Australian Government has coordinated an evacuation.

Could I be denied life insurance?

An insurer may decide not to provide life insurance to a person who has suffered a recent and extreme medical event such as a stroke, cancer or a heart attack. In addition, anyone who has a terminal medical impairment or disability that is deemed life-limiting and likely to be the cause of their death may find it difficult to secure life insurance cover.

According to Moneysmart, one benefit of having life insurance in place through your super is that there are generally fewer health checks as part of the application process, which can be useful if you work in a high-risk job or have health conditions that can make it difficult to get insurance outside super. Nonetheless, it advises consumers to check the product disclosure statement (PDS) to see the exclusions and treatment of pre-existing conditions that may not be covered.

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