Life insurance: Running the risk

Life insurance policy premium anomalies mean you should look carefully at when you sign the bottom line, writes Rob Stock.

A loophole in most life insurance contracts means people with risky hobbies like hang-gliding and scuba diving pay through the nose for new policies, but those who take up an extreme hobby after they've taken out their insurance don't.

For example, a 25-year-old non-smoker in good health taking out $300,000 of life cover would pay roughly $23 a month for cover with online insurer Pinnacle Life, but his twin who hang-glides would pay about $78. That's $3 per month per $1000 of cover onto life insurance premiums, said Ed Saul from Pinnacle Life.

But next month, if the hang-gliding twin persuaded the other to take up the sport, his premiums wouldn't rise.

"We assess the risk at the time the policy is taken out," said Saul. "I know that sounds crazy because the next day you could start smoking or motor racing, but those are the risks we take."

That's very different from other forms of insurance. Once a year when your car insurance premiums go up, insurers require policyholders to tell them if anything has changed that would require them to reassess the risk of issuing the policy.

Saul said insurance underwriting was dictated to a large degree by giant re-insurers like Hanover Re, which re-insure New Zealand's insurers. Dangerous hobby loadings on hang-gliding come from them, and are calculated from vast pools of international data.

Mountaineering, abseiling, rock-climbing, and scuba below 30m, or motor racing where speeds are above 150kph, would add $2 per month per $1000 of cover, or $50 in the hang-gliding example given above.

Amateur helicopter piloting would cost marginally more, adding $62.50 to monthly premiums, while trans-ocean yachting and microlighting would add $125 to those premiums.

Some apparently risky hobbies like deer hunting do not get singled out by the reinsurers, and any extra risks are swallowed up in the giant pool of ordinary risks like death by car accident, heart attack or murder.

The loading was based on international numbers, however, and would reflect closely the added risk of death which, for example, hang-gliders experienced compared to those whose feet were firmly on the ground.

Saul said it wasn't necessarily that the hobby itself made it roughly three times more likely in any one year that the hang-gliding twin would die, but the hobby might indicate they were risk-takers in other aspects of their lives.

Those who have dangerous occupations can end up paying weightings far heavier than hobbyists. An agricultural pilot would expect a weighting of $250 extra a month, while a professional racing driver would have to find an extra $125 a month, which is similar to the sum an explosives expert would have to stump up.

- © Fairfax NZ News