How insurers can damage your mental health

A history of conditions such as depression can affect your chances of cover. Chiara Cavaglieri reports

The Government may be making efforts to tackle mental-health problems with a new 10-year plan announced last week, but can the same be said for the insurance industry?

Mental-health charities have welcomed ministers' ambitious plans for a three-pronged attack covering early intervention from GPs, counselling services at schools, and co-ordinators working with Job Centres to help people get back into work. However, for the estimated one in four people in the UK who suffer from a mental-health condition at some point in their life, there are still many unresolved issues when it comes to insurance.

"We regularly receive calls from people who have been refused life insurance outright, because of their mental-health problems. We also hear from people who have tried to claim on their travel insurance but failed because of a clause that means insurers don't have to pay out for mental-health issues, including depression, stress and anxiety," says Sarah Murphy, financial inclusion officer at the mental health charity Rethink.

Consumers taking out life cover, critical illness, income protection and travel insurance are required to provide details of both their current state of health and their medical history. The insurance company uses this information to set the premium level and may refuse to cover certain conditions if related to a pre-existing health issue. This can be fairly straightforward in the case of a broken leg, for example, but when it comes to mental illness, there are many more complications and because of this insurers will often simply refuse to cover it.

"On income protection in particular mental illness is a regular exclusion. Mental-health issues are the second-highest cause of income protection claims, behind musculoskeletal conditions, such as bad backs," says Alan Lakey, from independent financial adviser (IFA) Highclere Financial Services.

"It also has an impact on critical illness applications where the degree of the condition may cause a premium loading or exclusion," he adds.

Under the Disability Discrimination Act, it is illegal for insurers to refuse to cover or charge higher premiums unless they can demonstrate statistically higher risks because of a specific mental-health condition. Therefore, when deciding whether to insure someone, they should carry out a risk assessment, complete with statistical analysis. After this assessment, the company can refuse cover, increase premiums or exclude a claim that results from mental illness, as long as they can prove that that person presents a higher-than-average risk. Exclusions are particularly common on critical illness and income-protection policies, and, even worse, only two insurers will offer lower premiums to balance the reduced cover.

"If mental-health related claims are excluded from an income-protection policy, both Fortis and Aviva offer premium reductions to compensate for the exclusion. No other insurers will do this," says Matt Morris, from protection broker LifeSearch.

Conditions such as pre-natal or post-natal depression should be looked at more favourably, because it is considered to be an isolated incident, and, when it comes to life cover, stress and anxiety, cases should also be accepted at ordinary rates. However, while there is a good chance that mild depression will be accepted without affecting premium levels, if there is a long history of severe depression or the policyholder has ever been suicidal, there may well be a premium hike or even a refusal to cover.

Many mortgage lenders insist that customers take out life insurance, so if people are being refused cover for severe mental illness, they may face real problems getting a mortgage.

Much of the difficulty lies in knowing what might be considered high risk by the insurer. There is no common policy among insurers as to how serious depression has to be, or how long someone has to suffer with it for an application to be rejected.

"You have to realise that life assurance is not a public utility. It is, in effect, a business deal. The underwriter makes a bet on how long he reckons you are going to live, based on the medical evidence and disclosure. If he doesn't fancy taking on the risk, that is his prerogative," says Harry Katz, from IFA Norwest Consultants.

He adds that being refused by several insurers can actually make the situation even worse. "It acts as a red flag to other insurers who take the easy route and say no thanks."

And those tempted to not declare previous mental-health problems when taking out insurance are best advised not to go down that route.

Non-disclosure of any condition can lead to an insurance being invalidated at claim time as insurers may ask to see a claimant's medical history. Under an agreement among members of the Association of British Insurers (ABI), only serious non-disclosure should lead to a claim being rejected outright. However, insurers are free to reduce payouts if they find that the policyholder has been less than honest, even if the non-disclosure doesn't relate to the claim.

Overall, though, until there is further clarification on how insurers assess policyholders with a history of mental illness it is well worth going to a broker and seeking some independent financial advice. An IFA can speak directly with underwriters and find the best provider to suit your needs. There are also several specialist brokers that may be useful for people with mental-health problems, including Pulse Insurance, The Insurance Surgery and Orbis Insurance, which are all geared towards people who have been refused cover because of a pre-existing medical condition.

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