Restrictive Clauses in Life Insurance: Impact on Policyholders

Examination of Restrictive Clauses in Life Insurance Policies

The issue of restrictive clauses in life insurance policies from the 1990s and 2000s is gaining increased attention. These clauses significantly impact policyholders with terminal illnesses by preventing early payouts if the policy is near expiration, typically within 12 to 18 months. This complication hinders access to crucial terminal illness benefits for many policyholders.

Terminal illness benefits are designed to enable policyholders to withdraw funds in advance to cover medical expenses or offer financial support during their illness. However, many individuals are discovering contractual limitations that block expected benefits. Since around 2013, regulatory scrutiny and industry adjustments have led insurers to cease the use of such clauses, yet older policies remain unchanged, potentially affecting hundreds of thousands.

A notable incident involved a policyholder whose claim was denied by Aviva due to the proximity of their 2001 term policy's expiration within 18 months. Insurer representatives maintain that these restrictive clauses were initially intended to prevent payouts in scenarios lacking subsequent standard death claims. They argue that premiums for policies with these restrictions were generally lower than policies offering full terminal illness coverage.

Dale North from Pure Protect highlighted the emotional toll these limitations impose, describing the distress faced by those with terminal diagnoses. He noted that some individuals are left hoping for death within the insurance period to ensure benefits for their families, a psychologically damaging outlook.

Similarly, Holly Tomlinson from Quilter pointed out that older life insurance exclusions wouldn't meet today’s standards, particularly for terminal illness claims near policy expiration. She emphasized the importance of regular reviews to ensure life insurance arrangements meet current needs and expectations.

In 2023, the Financial Conduct Authority (FCA) began a review to address potential unfavorable outcomes for customers due to these terms. While suggesting that insurers reassess such clauses, the FCA has not mandated changes to existing contracts. An Aviva spokesperson recognized that pre-2013 term life insurance policies often included these restrictions, with newer policies adjusted in price to offer extended coverage.

Industry professionals and regulators continue to scrutinize the influence of historical clauses on policyholders, examining potential solutions to mitigate the associated challenges. The ongoing evaluation may guide future regulatory compliance requirements and industry standards in life insurance.