Potential disadvantages to changing insurance policies

Changing from one life insurance policy to another (a process known as ‘switching’), can impose some disadvantages on the person making the switch. These include:

Loss of coverage for health issues that have commenced after your existing policy commenced.

Most existing insurance policies are guaranteed renewable. This means that the insurer is obliged to continue to offer you a policy on the same terms as were offered when you initially commenced the policy. This means that any health issues that you have encountered since you first took out your existing policy should be covered by that policy. If you change policy, then any health issues that exist on the date the new policy commences will not be covered. Accordingly, if there is any chance that you have developed an illness since you first commenced the existing policy, you should not undertake a new policy without obtaining written evidence that the new policy will cover you for that illness.

Certain policy inclusions do not commence for a period after the new policy comes into effect

Many life insurance policies do not cover you for illnesses or events that occur within a certain period of the commencement of the policy. For example, most life insurance policies will not pay a death benefit if a person dies by suicide within a set period (often 13 months but sometimes longer) following the commencement of a policy. You need to be aware that changing policies may result in you losing coverage for certain events for the initial period following the change.

Different policy definitions

Unfortunately, much of the content of life insurance policies differs from insurer to insurer. Different insurers interpret aspects of a policy in different ways. For example, one insurer may define a heart attack differently to another insurer. Unfortunately, given that there is at present no indication of what insured events, if any, are likely to occur, it is not possible to say whether the definitions used by the new policy will be more beneficial to you in the event of a claim.

If you change your life insurance policy provider, there is a chance that the new insurer will impose a more rigorous definition on some event which is yet to happen and that you will not be able to make a claim. That said, there is also a chance the new insurer has a less rigorous definition and the new policy will offer enhanced coverage. As we state above, because the nature of any future insured event is currently unknown, we cannot state whether the definitions used in the new policy are more or less likely to be in your favour.

Renewed three year period for inadvertent non-disclosure. 

Section 29(3) of the Insurance Contracts Act 1984 (Cth) allows an insurer to avoid a life insurance contract for breach of the duty of disclosure before the contract started, provided no more than 3 years have elapsed since that date. This means that if you unintentionally fail to disclose something that would affect the insurer’s decision to offer a policy, then the insurer may use that non-disclosure as a way of denying a claim on the policy.

But the insurer can only do this for the first three years of the policy. Therefore, if your existing policy is more than three years old, any health matters that you inadvertently failed to disclose when you took out the existing policy can no longer be used to avoid making a payment. The insurer is obliged to continue to offer the existing policy as a guaranteed renewable product.

Taking out a new insurance policy creates a ‘new’ three year period in which your insurer may be able to avoid the contract in the event of inadvertent non-disclosure. This creates an increased risk of a future claim being rejected.

You can, of course, reduce this risk by ensuring that you have not inadvertently neglected to tell the insurer something relevant. 

The Dover Group