If you look at your employee benefits statement, you may see something like “free cover limit” or “automatic acceptance limit” or “automatically accepted amount”.
Sound familiar?
If not, you may want to peruse that member benefit statement a bit more closely because it can make a difference to your life come claim time, especially if you’re a senior executive at your company.
What are free cover limits?
Simply put, your free cover limit means that the insurer will cover you for a certain amount before they start asking you medical questions. We see this a lot with our clients.
You work for the company, you're a senior manager, you're getting a five times annual salary payout for death or disability, for example. Because the insurer is insuring a whole company’s worth of employees (could be thousands of people, depending on where you work), you cross-subsidise each other cost-wise and risk-wise.
But now you're getting to a point where your earnings have gone up. You’ve climbed the corporate ladder, and your earnings are getting a bit above the threshold for the insurer. Perhaps you were earning R2 million a year before, and they were happy to cover you for five times salary. Now you got a promotion (congratulations!) and you're earning R2.5 million a year. That's a fundamental difference in the payout and a bit rich for insurer’s blood.
Read more: What is a continuation option and should I take it?
Where the free cover limit comes in
In this example, the insurer was happy to cover R10 million (five times your R2 million a year salary) without asking you any medical questions. Now, the cover you need has gone up to R12.5 million (five times your R2.5 million a year salary).
So the insurer might say for that extra 2.5 million life cover that you're going to get (in addition to the R10 million you already had), they're going to ask you some medical questions.
Usually how it works is that they’ll send you a form. You fill it in. Then a few things might happen:
Scenario 1: They agree to cover you. They adjust the premium accordingly and you have the R12.5 million cover. Hooray!
Scenario 2: They say you have a particular issue – heart disease, for example – so they’re not going to cover you for the additional R2.5 million amount. But you still have the R10 million cover you had before your promotion.
Scenario 3: They exclude the issue you have (in this example, your heart disease), so if you pass away and it's due to a heart condition, they won't pay out that extra R2.5 million but again, they will pay the original R10 million you already had. And if you pass away from something entirely unrelated to heart disease, they will pay out the full R12.5 million.
In other words, the free cover limit is what you will get regardless; anything above that and the insurer might ask some medical questions.
There's no free lunch in life, but when it comes to long-term insurance, a free cover benefit is probably as close as you get.
Want to know more about employee benefits? We explained the ins and outs in our podcast, The Enough Club. Watch the episode here.
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