Policy Continuation Options

To remain in force, a health insurance policy must be renewed periodically; in other words, the coverage remains in force only for the length of time for which premiums have been paid. When the premium is due again, the policy may be renewed or it may be allowed to expire.

Both the policyowner and the insurer have a role in the renewal process. The policyowner has the option of canceling the policy at any time by notifying the insurer of such intent, or simply allowing it to lapse at a premium due date by not paying the premium. Health policies also include specific provisions that determine whether the insurer may refuse to renew a policy. When the insurer has the option to refuse to renew, the policy may be one of two types. It may be optionally renewable, meaning that the insurer may elect not to renew the policy for any reason or for no reason, but can exercise that right only on the premium due date. Conversely, the policy may be conditionally renewable, which means that the insurer may elect not to renew, but only under conditions specified in the policy. To protect the insured's interest when a valid claim is being paid or is eligible for payment at the time the premium is due, the insurer may not prejudice that claim; that is, the claim must be paid even if the insurer elects not to renew the policy.

Unlike the optionally renewable policy, under the provisions of a cancelable policy the insurer may cancel coverage at any time, provided it returns any unearned premiums to the insured. And, like the optionally- and conditionally renewable policies, cancellation does not remove the insurer's responsibility to pay valid existing claims.

Cancelable policies are uncommon, and obviously not advantageous for the insured. The policy must contain a clause that permits the insurance company to cancel on other than a premium due date. The company may refuse to renew the policy on a due date, but without this clause the policy simply cannot be canceled. Health insurance policies today usually are not cancelable by the insurer. However, when canceling a policy with this provision, the company must notify the insured in writing, mailing the notice and the unearned premium amount to the insured's last known address. In most states, cancellation becomes effective no less than five days from the date of the notice.

In some policies, the insurer relinquishes its rights to cancel at any time and to refuse renewal on a premium due date. This type of policy is called guaranteed renewable, and it includes the following notable characteristics:

  • Renewal is guaranteed as long as the policyowner pays the premium.
  • The insurer may not cancel the policy unless the premium is not paid.
  • Premiums cannot be increased on an individual basis; they may only be increased on the basis of an entire risk classification, such as occupation.
  • The guarantee to renew ends at a specified age.

As stated, nonpayment of premium is the only reason an insurer may cancel or refuse to renew a guaranteed renewable policy. Furthermore, the insurer is not permitted to increase the premiums based on any individual experience of an insured. The company may, however, increase the premiums on a class basis. One common classification, for example, is by occupational groups. (Based on historical evidence, insurers know that individuals engaged in certain occupations are subject to a higher risk of accidental injury or death than those of other occupations. For example, the job risks faced by a data entry clerk are markedly different from those faced by, say, a coal miner.) Using updated experience ratings within an insured's occupational class, the insurer may increase the premiums for all insureds in that class of risk.

The guaranteed renewable feature is often limited. In some policies, the insurer regains the rights to cancel and to refuse to renew when the insured reaches a specified age, typically a normally accepted age for retirement, such as 60, 65 or 70. However, in many states the company's right to do this is limited if the insured is over the age of 54 when the policy is first issued. In such a circumstance, the insurer may not cancel or refuse to renew until the policy has been in effect for at least five years.

Since insurers expose themselves to higher risks by giving up the rights to refuse renewal and to cancel a policy, guaranteed-renewable-policy premiums are higher than those for cancelable policies. To illustrate, let's assume that a 58-year-old individual buys a guaranteed renewable policy, paying the higher premiums required for that type of coverage. When the person reaches, say, age 60, the company could conceivably cancel the coverage if that age were normally stipulated in the policy. However, the insured has paid an extra premium to for this coverage. So, some states require that if an insured is over 54 years of age when the policy is initially issued, the company must keep the policy in force for a minimum of five years, even though it might otherwise have cancelled or elected not to renew when the insured reached the specified age.

The terms non-cancelable and non-cancelable and guaranteed renewable are often used interchangeably to describe a non-cancelable policy. As the name implies, the insurer may not cancel or refuse to renew such a non-cancelable policy. While this appears identical to the guaranteed renewable policy above, there's one important difference: under the provisions of a guaranteed renewable policy the insurer may increase premiums by classifications, but under a non-cancelable policy the insurer may never increase the premiums. In other words, the initial premium of a non-cancelable policy is the premium that the insured will pay throughout the life of the policy. Other features are the same as those for guaranteed renewables: the insurer may only cancel the policy for nonpayment of premium, rights to cancel or non-renew are regained by the insurer at a specified age, and the policy must remain in effect for at least five years if the insured is over age 54 at initial policy issue.

Obviously, the insurer assumes a higher risk by being unable to adjust future premiums. Therefore, premiums for non-cancelable policies are somewhat higher than for other health insurance policies. As a general rule, only disability insurance policies (not healthcare policies) are non-cancelable.

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