Maybe you read about the federal Census worker in Kentucky? Two months ago, they found him hanging from a tree, naked, with his hands bound by duct tape and the word "FED" written on his chest. It looked to all involved as a hate crime of the worst kind.Digging deeper though, this hate crime might have really been a suicide in disguise. But if that is the case, why would anyone do that? The answer may lie in the printed word. A small contractual provision in every life insurance policy - the suicide clause. Turns out the man had recently purchased a life-insurance policy and made his 20-year-old son the beneficiary. All the facts are not clear, yet. But if this is true, then he evidently knew the policy would NOT pay if his death was determined to be a suicide.
A suicide clause excludes any payment of policy proceeds if death results from suicide within the first two years of the policy’s issuance. At that point, all the insurer is obligated to do is refund premiums paid. By trying to make the death of the Census worker look like a homicide, he may have been trying to skirt the suicide clause and get full payment for his son.
Once the two years pass, the insurance company cannot exclude the payment of the policy proceeds if death was deemed to be suicide. Why do insurers include this suicide clause in their contracts? The answer is really simple. Life insurance works on what is called the law of large numbers. But the mortality costs are based on the predictable pattern of natural death. Suicide is not a natural death and skews the statistics. The pricing of policies change dramatically if suicide is included as a benefit. It is presumed no one would buy a policy with the express intent of committing suicide and then wait two years to perform the act.
Each State regulates life insurance sold in its jurisdiction and has their own set of regulations for various contractual provisions. There is not a uniform insurance code throughout the US. Most carriers would prefer a permanent exclusion for suicide. But state regulation forbids this, usually limiting it to no longer than two years.
Another reason to have this provision is public policy. Society certainly does not want to encourage suicide. If a person could purchase a life insurance policy and soon thereafter, do the deed, despondent parents, bankrupt business owners or anyone who is possibly deep in debt or out of work, could be tempted to “take the easy way out.” Frankly, it is NOT that hard to qualify for insurance. Pay one premium and make someone financially whole - an easy solution, but bad for society in general.
Would it be possible for insurance companies to include the risk of suicide in their pricing? Certainly. All an insurer has to do is revise their mortality costs to include suicide. This would, of course , increase life insurance premiums significantly. Current statistics show approximately 30% of the US population has life insurance coverage. So raising the price would not be received favorably by a population who reluctantly allocates part of their annual income to provide financial security for their family now.
Remember, life insurance is NOT free. It is risk sharing between consenting parties. It is a zero sum game in that, the carrier must collect enough money to pay the benefits from the premiums it collects. So if suicide restrictions were removed, it would increase the probability of an early payout before the insurance company could fully earn enough additional money to cover their administrative expenses and cost of benefits.
If you think about it - Life insurance is really a miracle financial instrument. Where else can you instantly create a substantial lump sum by merely depositing a fractional share of the value to be received? At younger ages, life insurance costs less than 1% of the initial face amount of the policy. Only through risk sharing, made available through insurance companies, can this happen. It is an amazing financial tool.
No comments:
Post a Comment