Unfair or Logical

Are Life Insurance companies unfair or simply being logical? Newspaper reports in the early months of 2008 that life insurance companies will start charging overweight customers up to 50% more in premiums, begs the question whether they are being unfair or simply driven by actuarial logic.

Some people might consider it "unfair" that because they are overweight, they should have to pay, for example, £1,500 a year for a £150,000 life cover whereas his leaner peers will be paying only £1,000.

But the sheer logic of the situation is that life insurance companies are in the business of assessing the risk of an early death of their policy holders. And obesity is a medical condition with attendant health problems that can lead to an early death. Obesity has been linked as a major contributor, for example, to heart and liver problems, diabetes and certain forms of cancer. Many insurers, therefore, are paying increasing attention to the critical "body mass index" (or BMI) in new proposals for life cover.

The body mass index is a simple measure, widely used in medical circles, as an indicator of obesity. It is the index derived by dividing a person's weight (in kilograms) by their height (in metres) and dividing that result by their height (in metres) once again. A resulting index of 30 or more is classified as "obese" and a result of 40 or more as "very obese". According to responses to press questions from Britain's largest life insurance company, some 13% of new proposals are being made by individuals reporting a body mass index in excess of 30. This appears to be the marker at which many life insurance companies are introducing higher premium rates.

The actuarial logic of the situation is not lost on the Association of British Insurers, of course, who have said that obesity increases the risk of contracting certain diseases. A spokesman commented that premium increases for the overweight should be considered in the same light as those increases already applied to smokers or to those with previous or pre-existing medical conditions. In fact, when taken together, the difference in the cost of premiums for someone of the same age and gender in the lowest and in the highest risk groups can be as high as 400% - reverting to the example used earlier, that would be the difference between £1,000 and £4,000 each year for £150,000-worth of life cover.

Just in case these figures give any encouragement to lie about your weight or height on the proposal form, there is a salutary warning from the Financial Ombudsman. The latter recently determined a disputed claim arising from the death of a 37 year-old man who had declared to his insurers a height of 6ft and a weight of 16 stone. He died some months after the start of the life cover, but his life insurance company rejected the claim when it was revealed that he was actually 5ft 9in tall and weighed 21 stone (measurements that would have increased his premium by 275%). The Financial Ombudsman ruled that the insurer had been right in rejecting the claim.

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