Optional Provisions in Health Insurance Policies

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Health insurance policies contain mandatory provisions as well as those that an insurer could offer as part of the policy. In this lesson, you will learn about optional provisions in health insurance.

What Are Optional Provisions in Health Insurance Policies?

Let's meet Cathy who is looking to purchase health insurance. Her insurance agent explained the mandatory provisions covered by the policy and now she has to decide which optional provisions are important to her. Cathy wants to make the right decision for her family but she doesn't know which provisions to select. Let's see if we can help Cathy with this decision.

Health insurance is a type of insurance that pays for expenses that government plans do not cover. Certain provisions are mandatory and must be included, but insurers can also offer optional provisions. There are number of optional provisions, including:

  • Change of occupation
  • Illegal occupation
  • Misstatement of age or sex
  • Relation of earnings to insurance

Let's examine each of these optional provisions in more detail.

Change of Occupation

Insurance companies consider someone who has a risky occupation such as a skydiving instructor, a higher risk for disability than Cathy who works in an office. The change of occupation optional provision allows an insurance company to increase the policy premium or the amount an insured would pay for the policy if the insured changes to a more risky occupation. The insurance company would decrease the premium if the insured changed to a less risky occupation.

If the insured does not notify the insurance company of a change in occupation, it will alter the insured's benefits if the insured becomes disabled. For example, let's assume that Cathy gets a new job and she is now a pilot. The insurance company would consider this occupation a much more risky occupation than her previous job in an office. As a result, the insurance company would increase Cathy's premiums for her policy to reflect the higher risk.

Illegal Occupation

Under an illegal occupation provision, an insurance company will not pay any benefits to a policyholder if the loss occurred when the policyholder was committing a felony. Let's assume someone injured himself or herself climbing over a fence after he/she robbed a store. The insurance company would not pay any benefits related to this injury. The illegal occupation provision also applies in situations where a policyholder has an illegal occupation.

Misstatement of Age or Sex

The insurance company calculates the policy premium on a number of factors including the applicant's age and his/her sex. If the applicant is not truthful about either his/her age or sex, then the policy premium will be incorrect. When an insurance company discovers this misstatement of age or sex, the benefits that it will pay will be consistent with the policyholder's correct age and sex.

Let's assume that Cathy indicated that she was 35 on her application when she was really 45. The insurance company would charge a higher premium to a 45-year old as she would represent a greater risk to the company. When the insurance company discovers the error, it would reduce Cathy's to a level that the premium she paid would have purchased.

Relation of Earnings to Insurance

If the policy has a relation of earnings to insurance provision, then a policyholder cannot claim benefits that are greater than his/her monthly income at the time he/she became disabled or his/her average monthly earnings for the previous two years. This provision applies to situations where a policyholder has more than one disability insurance policy and the benefits under all policies are greater than his/her current monthly income. Under this provision, the insurance company is required to pay only a proportionate amount of benefits to the policyholder.

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