Individual Disability Income polices can be rescinded for several reasons such as failure to pay premium, and inaccuracies, knowingly or otherwise, written on application forms. “Rescinded” basically means terminated, or lapsed. Sometimes it can come as a surprise to insureds when they never intended to end their coverage. The question is, “what do I do now?”
Unfortunately, claims and underwriting are two different departments and rarely communicate with each other. The issue of non-payment of premium is handled by the underwriting departments, who are not known to be efficient or timely. It is not uncommon to receive a letter from an insurer informing your policy has been rescinded, weeks, or months after it already took place. But, let’s review the rules.
Nearly all insurers will allow insureds to be late 31 days before rescinding for non-payment of premium. At this time, or a later time, a letter will go out informing insureds they no longer have a policy. Insureds who wish to keep their policies “in force” can file an application of reinstatement.
Insurers will conduct an underwriting investigation and can ask insureds to fill out additional forms inquiring about their medical status. At that point, the insurance company can do several things. First, it can refuse continued coverage due to medical underwriting reasons. Second, it can issue the policy with increased premium EXCLUDING medical diagnoses from past or present conditions, and finally it can issue the policy without exclusions with increased premium.
Of course, the insurance company will require payment of all lapsed premium in addition to the new premium billed for reinstatement purposes.Forgetting to pay premium can turn out to be a serious costly mistake.
Another reason by policies can be rescinded involves the discovery of misinformation given by insureds during the application process under a provision called, “Incontestability.”
Although most IDI policies contain “incontestability” provisions, meaning misinformation would have to be discovered within 2 years of the Effective Date of Coverage, polices can be rescinded for misinformation given by insureds on the initial applications.
For disability policy purposes, inaccurate information written on applications for coverage are presumed to be “misrepresentations”, not “fraudulent warranties.” Therefore, insureds “who made a mistake” on their applications won’t go to jail, but they may lose their coverage.
The instructional example always used by insurance educators is the one where a woman lies about her age on the application. If discovered within two years, the policy will be rescinded. A new policy can be issued (or not) using the correct date of birth. The insured would, of course, be responsible to compensate the insurance company for any difference in premium.
The lesson here is to make sure premium is paid within 31 days of billing. And, making sure any application for disability insurance contains accurate information. Once, a Unum policy was rescinded because the insured did not disclose the fact that she used Advil. This decision was easily overturned. ( An obvious U-nummies mistake!)
Anyway, you now know what you could be facing if a rescission or lapse happens to you. If you have any questions about this, please feel free to contact me.
http://www.disabilityclaimssolutions.com
