Pre-existing conditions in insurance are used as an additional layer of underwriting for an insurer selling in the individual market. With most individual health products there is some level of underwriting. The underwriting can be at many levels between simplified and comprehensive. In most cases for individual insurance, pre-existing condition clauses are used on simplified underwritten products, though some comprehensive coverage’s also utilize them. By not allowing individuals to immediately collect large benefits for known health conditions, insurance premiums are made more affordable for all. More underwriting equals lower premiums.
Many people are confused about why insurers use pre-existing conditions as part of individual insurance contracts. In many cases pre-existing condition clauses are portrayed negatively, when in fact they are a positive addition to most insurance contracts. If potential customers were able to only buy insurance when they needed it and dropped it immediately after filing a claim, premiums for coverage would be unaffordable for most. To prevent this, most contracts include a look back period of six months to two years and do not pay for a pre-existing condition during the first six to twelve months coverage is in force.
Just because an individual insurance contract has a pre-existing condition clause doesn’t mean it is always going to get used. Claim investigation is expensive, so unless a claim is due to a health condition that is potentially expensive, the claim may not get investigated. Accidents would not fall into the pre-existing category, and would be paid immediately in most cases. Smaller claims for more common conditions that are easily handled during a doctor office visit, like sinus infections, are also unlikely to cause a claim investigation.
There is occasionally confusion about pre-existing conditions causing a claim to be denied or coverage to be rescinded versus a normal investigation of a claim during a policy’s contestable period. If a claim investigation happens during the contestable period of a policy, and medical records are discovered that show that an applicant may have intentionally or unintentionally misrepresented answers to questions on the original application, an insurer is within their right to rescind or reform the coverage based upon the correct answer. Often times when a policy is rescinded during this contestable period it is inappropriately blamed on the pre-existing condition clause.
The best advice for an individual is to always be truthful during the application process, to the point of over disclosure. Keeping detailed records about one’s medical history will ensure that all application questions are answered properly to avoid any potential conflicts at claim time.