How fair is the three-strike rule for income protection?
I profess that until recently I had never heard of the three strike rule for income protection (IP). That’s because it’s a topic that isn’t talked about much in the protection industry.
Much of the focus on IP has been on raising awareness due to dismal sales numbers.
The utilization of income protection is not as high as that of other protection products. Several reasons have been advanced for the apparent lack of interest from consumers and advisors.
Advocates have argued that consumers don’t think they need IP and advisors perceive it as complicated. But is there more to it than meets the eye.
I am not here to discuss the pros and cons of intellectual property. I have already done this in my previous essay where I discussed my IP journey from skeptic to believer. Here I want to examine the little-known or little-discussed three-strike rule for income protection.
The rule addresses a scenario where an insurer believes that disclosing a customer’s health, hobbies or occupation puts them at higher risk of a claim on their policy. In this case, the client’s request for coverage will receive a two-letter word “NO” from the insurer.
You may be excluded from IP coverage for several reasons, including depression, back pain, mental health, neurological conditions, and escalation, among others.
A decline can come from any combination of the three areas of disclosure listed above. Industry insiders say you’ll tend to find exclusions are mostly based on health and hobby disclosures.
Occupational exclusions are not as common as the insurer often denies the claim if they are concerned about occupational hazards.
I recently read a powerful essay on the subject from a prominent protection journalist whom, for obvious reason, I will not name in this article. But their article on the three strike rule had an impact.
The author gave a touching personal account of their terrible experience with insurers because of the rule. They detailed the difficulties in obtaining income protection coverage from all major insurers after their health disclosure.
It was a heartbreaking tale to say the least and all the author wanted was to ensure the safety of their dependents if they were no longer able to work due to illness or disability. .
This seems unfair and defeats the very purpose of intellectual property: to provide a safety net should the worst happen.
Testimonials like this really tug at the heartstrings. This was not a cutesy story from a self-proclaimed journalist. This case study is just one of many in a growing list of people, including industry figures, who are being denied IP coverage due to the three strike rule.
I understand that insurers are not in the game to provide charitable handouts. I know I am stating the obvious that profit and bottom line is what matters to them.
And I understand that insurers take this step, however unreasonable it may be for some people, because intellectual property is the most requested product of protection.
But this argument is becoming increasingly tenuous. Many figures in the protection sector believe that the exclusion policy should be reviewed. They argued that insurers should consider the needs of the customer and avoid the single underwriting process.
I contacted Kathryn Knowles, managing director of specialty insurer Cura Financial Services, to find out more.
She has written extensively on this issue and her firm helps provide coverage for clients with pre-existing health conditions or dangerous hobbies.
She says, “We researched this and found that about 3/4 of providers refuse once there are more than two medical exclusions. We had a case referred to us with a fit and active 30-something who was turned down for IP.
“The declines were from a knee, shoulder and hip exclusion. These were sports injuries, not medical. Their view was that they weren’t going to stop working at their desks to a sore knee it would be if they were diagnosed with cancer or had a stroke.
Knowles, who is a formidable player and influencer in the protection industry, cannot get IP coverage for herself.
Although she has helped countless people with pre-existing health conditions, she finds it nearly impossible to change insurers’ minds about her. I find that shocking.
“So many things I was diagnosed with that weren’t life threatening, none that required me to take time off work. Still, I can’t get it,” Knowles tells me.
She continues: “A key point is that insurers shouldn’t assume that people won’t want coverage if there are a few exclusions. Give people the choice, let them decide what’s right for them. If there are any concerns about understanding the terms and exclusions, then make sure the option is only available through selected advised companies.
Another insider tells me that the entire underwriting process often leaves a lot to be desired.
They say common sense should be factored into the underwriting process. And they argue that advisers, who are widely known for their outspokenness, can help apply a little common sense and make the process fairer.