Some of the people I talk with wonder how quickly insurance companies pay claims. As with many things to do with personal insurance, that answer is ‘it depends’. Different insurance products have different claims requirements. Also, as we’ve seen recently in the news with Westpac, not all insurance providers are created equally.
- Personal insurance product groups
- Product benefits get paid differently
- When do insurance companies not pay?
Broadly, there are five personal insurance categories or product groups. Life insurance, permanent disability, trauma, monthly paying income replacement and medical. You can listen to my podcast here which explains these differences. Each product group is designed to do different things and cover different financial risks for the client.
These differences also mean that the claims requirements are different for each.
Product benefits get paid differently
The easiest and simplest insurance is life insurance. It is a nice marketing job to call it ‘life’, however it is an insurance that pays out on the death of the insured. Some policies will cover terminal illness, but let’s keep this straightforward. The surviving spouse or family member will make a claim to the insurance company, probably via their financial adviser. The insurance company will need the signature of the surviving policy holder(s) and proof that the insured has passed – this is normally in the form of a death certificate or other approved document from a qualified medical practitioner. A good insurance company will typically pay out within days of getting all the required documentation. A note to mention here is that insurance firms will mention a range of benefit payment period to be within 30-60 days in their policy documentation. In reality, good firms pay as quickly as possible to help the clients.
Delays can come about when there is not a clear owner of the policy. If the benefit from the life insurance is disputed as part of the deceased’s will, then the payment can be tied up in probate, as the courts decide ‘who gets paid what’. Having a will in place helps to solve most of these issues. Having clear policy ownership across more than the insured is another good thing to do. Your insurance adviser will help guide you through the best policy ownership structure, relevant to your situation.
Monthly paying disability products (like income protection or mortgage repayment insurance) are more involved and require more information for claims. These essentially assess if you are able to work in your job, matching to the criteria of the policy wording. Throw in the ‘wait time’ that was selected by the client, which could be anywhere from 4-52 weeks, and delays can certainly appear to mount.
A trauma claim I did recently for a 55-year-old male following a heart attack saw this person paid by the insurer within 8 days of the event.
When do insurance companies not pay?
There was an article in Stuff regarding Westpac taking 12 months to make a determination on a client’s life policy, only to turn down the claim. The client’s lawyer got the decision overturned. This is not a typical experience for clients, though this story does highlight that not all insurance providers operate equally. The new regulations coming into effect in March 2021 require all participants in the financial services industry to act in a timely manner when interacting with clients. Taking a year to decide on a life claim obviously falls outside of “timely”.
Claims pay-outs for insurance companies are typically very high. Many firms will have claims statistics showing around 90-93% of all claims submitted are paid. Of the remaining 7-10%, 2-3% are not paid due to deliberate fraudulent activity, 2-4% are for non-disclosure of health conditions, and 2-3% do not meet the claims criteria.
One thing I say often to my clients is that it is in the interests of insurance companies to pay their clients as smoothly as possible. There are two clear reason why. The first is that if they don’t, they will soon get a bad name in the market, and people will switch their policies to providers who look after their clients. The other reason is that advisers, like me, will stop advocating for firms who treat our clients poorly. For many insurance companies, we are the front-line sales force, and their only sales channel. Our relationship is with our clients first, providers second. If our clients get treated badly, we will respond accordingly. To be fair, most of the top personal insurance companies in New Zealand work hard to ensure that all claims that can be paid, are paid. If you are unsure about the claims record of your life insurance provider, ask your adviser.