CMLB022

Aspects of Long-Term
Insurance
 introduction
 Insurable interest
 In order to take out a life assurance policy, particularly for another person, you must
have what is known as an insurable interest in the life of the person to be insured. This
important point is not enshrined in the Insurance Act, but arises from the common law. It
puts an onus on the assured person to prove that his or her death or disablement would
lead to some form of loss or reduction of a right. And yet, although insurable interest
must exist when a policy is taken out, it need not endure to the date of payment.
 You have an unlimited insurable interest in your own life and that of your spouse.
Moreover, because South African law places a legal obligation on parents to support their
children, and reciprocally on children to support their parents (but not their in-laws) and
grandparents who are unable to provide for themselves, an insurable interest is created
by this responsibility.
 Other than this, a parent does not normally have an insurable interest in the life of a
child, or a child in the life of a parent, unless special circumstances exist, such as the
parent or child having a fnancial interest in the other person, for example, in business.
 Introduction
 A limitation on the amount for which a child may be insured is set out in section 50 of
the Insurance Act, which specifes a maximum of R10000 if the child is under six years
of age, or R30000 if between six and 14.
 This limitation does not imply that assurance for children should not be taken out.
Savings that are commenced early accumulate bonus additions, or growth, from
inception for needs that become more apparent later in life.
 The combination of compound interest, lower taxation for assurers, and regular
savings can produce worthwhile results.
 A policy that takes a long time to mature makes sense in view of the health aspect of
assurance – children have little difculty in being accepted for assurance.
 Longer term policies can always be shortened in whole or part if necessary, or
converted to another type of insurance – such as from a life policy to an endowment
policy.
 ASPECTS OF LONG-TERM INSURANCE

 Long-term insurance business means the business of providing or undertaking to

provide policy benefts under long-term policies.
 Long-term policy means an assistance policy, disability policy, fund policy, health
policy, life policy or sinking fund policy.
1. Commencement of long-term insurance contracts and cover
Section 51 of the LTIA provides that the undertaking of a long-term insurer to
provide policy benefts under a long-term policy, other than a fund policy or a
reinsurance policy, shall be suspended until the long-term insurer has received:
- one premium , if it is required.
- if there is two or more premiums, the frst of those.
Or until arrangements to its satisfaction have been made for the provision of the
premium by debit order, stop order, credit card or other instrument approved by the
Registrar generally by notice in the Gazette.
 1. Commencement of long-term insurance contracts and cover

 However, insurers still need to be cautious when the accept the risk. They must not
assume the risk ahead of time, that is, before such time as the insured has paid the a
deposit or arrangement to do so.
 This means, an insurer should not state that it has accepted the risk simply because the
client has completed a debit-order form authorizing payment of premium, since
completion of the form does not necessarily mean that the client’s bank will accede to
the request.
 In some instances, parties may agree on the commencement date of the policy.
 Firstly, they may antedate cover. For instance, the insurer and the potential insured
may agree to antedate (or ‘backdate’) cover. Antedate insurance cover simply means
that cover starts on a date preceding the date on which the contract was concluded (for
example, the contract is dated 10 February 2013 but cover commences on 1 February
2013). An insurer who agrees to antedate cover in a policy of life insurance must make
sure that the life insured has not already passed away.
 secondly, they may agree to predate the cover. It is also possible for the parties to
predate cover. Here, the contract specifes a future date for the commencement of cover
(the contract is dated 1 February 2013 but cover commences only on 10 February 2013
 1. Commencement of long-term insurance contracts
and cover

 Under LTIA, it is possible that an insured can later change his or her mind and be
allowed to withdraw from the contract and receive back any premiums that have been
paid.
 The Policyholder Protection Rules (PPR) under the LTIA provide guidance on how this is
done.
 Rule 6 (cancellation of policies and cooling-of) allows the insured to cancel a contract or
policy of insurance.
 The contract or policy can be cancelled where no beneft has yet been made or claimed
or an event insured against has not yet occurred.
 It is also possible for an insurer to insist on a waiting period to be included in the policy.
This means that the insured is not allowed to claim even though the policy has
commenced. Waiting periods vary from three month to six months, etc
 1. Commencement of long-term insurance contracts
and cover
 Death claims made under the policy of life insurance are often subject to a waiting
period in cases where death is due to natural causes (as opposed to death due to
accident).
 With funeral policies, there are usually waiting periods because the risk is not usually
assessed. The purpose of this is to protect the insurer against anti-selection, which
occurs when the applicant knows or suspects that the insured event has taken place
or is about to take place.
2. Amendments

 The long-term relationship between the insurer and the insured may be
afected by a change in the circumstances. If the change afects or
seems likely to afect the nature and content of the insurance contract,
the parties may want to amend the contract.
 The frst question is whether the parties may amend the contract
unilaterally.
 Typical provisions that enable unilateral amendments by the insurer
usually relates to the respective parties’ performances and most
amendments concern the premiums payable by the insured.
 Unilateral amendments are allowed, provided they only afect future
premiums.
2. Amendments

 Some insurance policies may specify that terms are subject to periodic
review.
 This does not amount to a discretion to unilaterally change the policy
but requires consensus between the parties.
 In some instances wherein the insured is allowed, he can also vary the
terms of the insurance contract. this includes the imposition or removal
of an exclusion, consolidation of two or more policies, or to even add an
additional life insured on the policy.
3. Renewal

 It is possible to renew a contract in the case of maturity of an

endowment contract.
 This may happen in three ways:
 The insurer may invite the insured to submit an ofer to the
insured.
 The second option is for a policy to extend the term of insurance
and the policyholder may unilaterally decide to continue with the
contract, provided that this option is exercised before the
contract expires.
 Tacit renewal, where a policyholder continues to pay his
premiums after the expiry of the term.
 4. Reinstatement
 Renewal occurs when a policy has lapsed because the insured had not paid the
premium.
 If the premium is paid within the 15-day grace period, the policy is in fact
renewed on its former terms.
 Section 52 regulates the lapsing of policies and reinstatement:
Section 52(1): If a premium under a long-term policy, other than a fund policy or a
reinsurance policy, has not been paid on its due date, the long-term insurer shall
notify the policyholder of the non-payment, and the policy shall remain in force for
a period of 15 days; or one month after the due date, or for such longer period as
may be determined by agreement between the parties, and if the overdue
premium is not paid by the end of any such period, the policy shall be dealt with
in accordance with subsection 2.
 4. Reinstatement
 Section 52(2): In the case of a policy contemplated in subsection (1) the remaining value of which,
after the satisfaction of any claim of the long-term insurer which is secured solely by the policy
benefts to be provided under the policy, is greater than half of the aggregate amount of the premium
payments due thereunder during the period of 12 months commencing on the due date of the unpaid
premium, the long-term insurer shall—
(a) inform the policyholder, in the medium prescribed by the Registrar, of the amount of that remaining
value and notify him or her that the policy will remain in force, in accordance with the rules of the long-
term insurer, until—
(i) the policy no longer has any such remaining value, whereupon it will
lapse; (ii) the payment of premiums is resumed; (iii) the provisions of the policy are amended, in
accordance with the rules of the long-term insurer, so that it becomes a policy which is fully paid-up; (iv)
the policyholder so requests, the policy is surrendered, in accordance with the rules of the long-term
insurer, and so much of the remaining value as then remains is, subject to section 54, paid to the
policyholder; and
(b) deal with the policy accordingly.
5. Exclusions

 Risk
In practice, the insurer may attempt to limits its liability for the risk insured
against in order to maintain the liquidity of the company.
Ofering unlimited coverage could leave the insurer facing fnancial ruin.
The insurer can o this in three ways:
- The insurer can add conditions to the contract.
- The insurer can add a time clause to the contract.
- The insurer can add qualifcations or exclusions to the contract.
 5. Exclusions
 Causation
A complainant in long-term insurance usually needs to prove that the event insured
against did occur. However, the insurer must prove that the death, disability, or sickness
was caused by an excluded event.
Mutual & Federal Insurance Co Ltd v SMD Telecommunications CC
The insured was a CC which has an insurance policy wherein the insurer undertook to
compensate the insured upon death or disability of it members. The CEO of the company
was involved in an accident wherein he sustained serious injuries. The insurer made
payments for temporary disablement but the CEO later died. Upon his death, the insurer
refused to make payment on the grounds that he died due to health complications
resulting from his pre-existing condition, as he sufered a heart attack.
The insurance policy had a clause that excluded this condition.
The SCA ruled in favour of the insured because the insured’s expert cardiologist presented
evidence that the insured’s health was in good condition prior to the accident and the
accident was the proximate cause of the resultant complications which led to his death.
5. Exclusions

 Conduct of the policy holder.

Negligent conduct:
Negligence is a concept in law used to denote the blameworthiness of an
individual for his actions. The test for negligence is an objective one. It
requires the determination of whether a reasonable person in the position
of the defendant would foresee the reasonable possibility of his conduct
injuring another in his person or property and causing him patrimonial loss;
and would take reasonable steps to guard against such occurrences; and
the defendant failed to take such steps.
When the insured causes the risk insured against to materialize, the claim
will be excluded only if there is a clause to that efect in the policy.
 5. Exclusions
 Conduct of the policy holder conti..
Intentional conduct:
An accountable person acts intentionally if his will is directed at a result which he causes
while conscious of the wrongfulness of his conduct.
Example: an individual takes an overdose of sleeping tablets because he wants to end
his life, or where he deliberately severs his fngers knowing that it would render him
disabled.
 Intentional conduct on the part of the insured may in certain circumstances remove
the need for the insurer to compensate the insured for his loss.
 However, it may also be that an insured deliberately and for good reason brings
about the risk insured against. And in these circumstances, the insurer may be
obliged to compensate the insured.
 5. Exclusions
 Conduct of the policy holder conti..
Suicide clauses:
Suicide is an insured’s direct or indirect intentional act to end his own life. A
suicide clause should be interpreted in order to understand the true scope and
efect thereof. It seems modern insurance contracts do cover suicide by an
express term, stating that cover will be provided if the suicide occurs after two
years of the commencement of the policy.
 5. Exclusions

 Conduct of the policy holder conti..

Self-inficted injury:
Insurers generally do not provide cover for self-inficted injuries in their health
insurance policies and will insert a clause to this efect in the contract of insurance.
Insurers do this because they are understandably unwilling to provide cover for- and
compensation for- losses that the insured has brought on himself.
Deliberate exposure to unnecessary danger:
Where a policy excludes cover if the insured purposefully and wilfully exposes
himself to unnecessary danger, such a clause will be interpreted restrictively, which
means that the insurer will have to prove all the elements of the exclusion. It stands
to reason that such a clause will not extend to normal, everyday hazards such as
driving a motor car or even saving someone’s life.
 5. Exclusions

 Conduct of the policy holder conti..

Pre-existing conditions:
A pre-existing condition in insurance law refers to an illness or health condition that the
potential insured had before he concluded the contract of insurance with the insurer.
The insurer may want to insert an exclusion clause in the contract to take account of the
pre-existing health conditions and illnesses.
HIV/AIDS:
Long term insurers have taken the view that HIV/AIDS is a treatable disease and have in
fact waived existing HIV/AIDS exclusion clauses.
However, HIV testing for insurance purposes remains a common practice and HIV-positive
individuals still stand to lose out in terms of health insurance available to them.
Be able to distinguish between the two circumstances why when dealing with HIV insurers
are more likely to ofer life insurance rather than health insurance.
 6. Incontestability clause
 These clauses have the efect that after a certain period, the insurer may not avoid a
claim because of any misrepresentation, fraud or any material fact.
 This clause is found in mostly life insurance policies. Incontestability clauses in life and
health insurance policies provide assurance to policyholders that a policy remains
valid and pays benefciaries without regard to any initial application misstatements at
the time when the insurance was purchased.
 An incontestability clause is a clause that prevent the insurer from voiding coverage
due to a misstatement/ misrepresentation by the insured after a specifc amount of
time has passed.
 An insured may pay a higher premium for an insurance contract with this type of
clause, but the advantage is that there will be greater certainty for the insured he/she
will be paid out if a claim is made.
 Incontestability clauses remove the possibility of claim denial for errors or omissions in
an insurance policy application, in most cases.
 While an incontestability clause works as a kind of consumer protection, stipulations
and provisions also protect insurers from fraudulent or deceptive claims.
7. Benefciary nominations

 It can be appreciated that an insured who insures himself against the

risk of death would want the insurer to pay the death beneft directly to
the benefciary instead of into his estate. There are three ways in which
the insured can accomplish direct and quick payment of benefts to a
third party, namely:
 The third party becomes a signatory and a formal party to the contract.
 The third party is identifed in the policy as a benefciary.
 The parties agree that the insured may nominate a benefciary,
immediately or at a later stage.
In the absence of a benefciary, the proceeds of a long-term insurance
policy form part of the deceased estate.
8. Policy loans

 It may be that when a person requires a loan from the bank, regulated
by the National Credit Act, the bank requires security for the repayment
of the loan and a credit receiver may cede a suitable policy as security.
Another possibility is to secure a policy loan from an insurer. This is
possible where the policy has an investment value and the loan may not
be fro an amount in excess of that value.