Why insurance cos prefer young customers?

Fears of Lifestyle Change At Later Stage Force Insurance Companies To Find Young Customers

 WHEN insurance companies say that it makes sense to start buying life cover early, they highlight how lower mortality charges enable you to buy a cheaper cover or how the power of compounding helps you earn better returns. But there is another reason why buying early makes sense. A little known section in the insurance Act makes it difficult for life companies from hiking rates for those whose life style changes subsequently or those who acquire harmful habits such as smoking or drinking later in life.
    In other words, any individual who buys a policy at age 20 and starts smoking at say 23 would continue paying the rates for a non-smoker. This is because according to Section 45 of the Insurance Act, an insurer cannot call in question any policy claiming that statements made were false or inaccurate after two years of the policy being taken out. This will make huge difference in the premium that the policyholder has to pay since the rate for smokers is almost 30% higher than what non-smokers pay.
    This holds for any person who later in life acquires a drinking problem as well. "But if it comes to our notice later that the proposer was suffering from clinical depression at the time of buying the policy, but did not disclose the same and took to excessive drinking later, we will not pay," said Andrew Cartwright, appointed actuary of Kotak Life Insurance, which had introduced a plan targeted specifically at non-smokers.
    Insurers say the rates are determined on the condition of the insured at the time of proposal, and continue to be in force later, despite any changes in the insured's lifestyle. According to Gorakhnath Agarwal, chief actuary at Future Generali Life Insurance, if any policyholder starts smoking or drinking after buying the policy, it is unlikely to result in a life threatening medical condition within two years of purchase - the time frame within which the proposal can be called to question. This is the practice followed by insurance companies world over because if insurers were not restricted from calling into question policies they would question every death claim on the grounds that it was because of a change in lifestyle which was not reported to the company.
    While nicotine content in the blood is the key indicator of the proposer's smoking/tobacco habits, flawed liver functioning as determined by blood tests would point to alcohol abuse. Alcohol consumption in excess of four units per day is also considered as abuse. "Though there is the possibility of some policyholders objecting to medical tests, the objections will be highest among clients with something to hide and hence, medical examinations are crucial," reasons Mr Cartwright.
    While buyers are not penalised for subsequent change in lifestyle, they are also not rewarded for more responsible behaviour. So even if a buyer chooses to give up smoking or drinking after buying a policy he will end up paying higher rates all his life. "At the time of issuance of policy, the company assesses the risk based on relevant medical and financial information provided by the customer. Thereafter the contract will continue between the company and the insured, irrespective of the change in the policyholder's financial or medical situation," explains Fabien Jeudy, chief actuarial officer, Birla Sun Life Insurance.

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