Everyone who has applied for any insurance in their life is familiar with the term “waiting period.” A term used for the time when consumers can expect no benefits from their insurer.  It is important for you to know about waiting periods and understand how and when claims are paid out.

Everyone who has applied for any insurance in their life is familiar with the term “waiting period.” A term used for the time when consumers can expect no benefits from their insurer.  It is important for you to know about waiting periods and understand how and when claims are paid out.

Reasons insurance companies have waiting periods

To prevent anti-selection

According to Jason Valenti, a product development actuary at IndieFin, waiting periods are there to prevent anti-selection.

“Anti-selection is when a policyholder takes out a specific benefit or policy because they either already have a condition or suspect that they might have one which could cause them to claim quite soon,” he says.

According to him, anti-selection occurs when the policyholder is withholding information which could affect the insurer’s decision.

For instance, if an individual is already sick with cancer or has symptoms of cancer, this individual is more likely to take out funeral cover because he wants to claim soon. So if this person can buy the funeral policy, it is likely that he would pay one or two premiums, but receive a significantly larger claim amount.

To prevent the policyholder from doing this, insurers create a waiting period.  This waiting period is normally 6 months. This means that within the first 6 months, claims will not be paid if the cause of the claim is due to a natural condition.

Valenti also says that there is a suicide clause in life insurance, which prevents policyholders from taking out life insurance and ending their lives immediately after. This suicide clause has a waiting period which ranges from 1 to 2 years.

To reduce premiums

Another reason for waiting periods is to reduce the price of cover when there isn’t sufficient underwriting done to filter out the policyholders who are likely to claim early.

Claims occurring within the waiting period are not paid and therefore the cost to provide the cover is smaller, which means the premiums can be reduced.

Can you be refunded on your premiums if you cancel your insurance before the waiting period comes to an end?

According to Valenti, insurance companies do not refund premiums if you cancel your insurance within a waiting period, as this wouldn’t be financially viable for insurers.

However, there is a standard 30-day cool-off period that everyone in the market offers, whereby a client can cancel his policy within 30 days of purchasing it for a refund of his premiums.

Valenti concludes that if there was no waiting period, there would be more claims during this period that the insurer would have to pay out.

This article has been prepared for information purposes only and it does not constitute legal, financial, or medical advice. The publication, journalist, and companies or individuals providing commentary cannot be held liable in any way. Readers are advised to seek legal, financial, or medical advice where appropriate.