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Moral Hazards in Life Insurance: The Suicide Exclusion October 8, 2007

Posted by federalist in Finance, Healthcare, Human Markets, Open Questions.
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I was surprised to discover that life insurance policies cover suicide after a two-year “exclusion” period.  (I.e., after two years of paying premiums an insured can kill himself and the insurance company will pay out the full benefit.)  I was even more surprised to discover that nobody writes life insurance with a total suicide exclusion.  A few observations:

  • Obviously the fact that life insurance covers suicide creates a tremendous moral hazard.  People with active life insurance have a financial incentive to commit suicide!  There is ample evidence that this incentive has a real effect, as detailed in Samuel Hsin-yu Tseng’s paper, “The Effect of Life Insurance Policy Provisions on Suicide Rates.”
  • As far as I can tell, the exclusion period stems from a majority of state regulations.  Life insurance is regulated at the state level, and (as of 2005, ibid. page 4) 36 states require life insurers to cover suicide after no more than two years of the policy being active.
  • As a consumer I would like to be able to buy insurance contracts that don’t pay a suicide benefit.  Such policies would be substantially cheaper.
  • The irony: Our government forbids anyone from being compensated for donating organs to save the lives of others (supposedly because of the moral hazard of such an incentive), yet it requires insurers to create an incentive to commit suicide!

Comments»

1. Kenneth W. Faig, Jr. - January 10, 2008

I do intend to read the Tseng paper. I am not sure that I believe intercompany statistics relating to death by suicide in years 1-2 simply because some insurers may treat such contracts as void from the beginning and exclude them from their reported statistics (that is the rationale behind return premiums for suicide claims in years 1-2).

I think the 2-year exclusion that applies in a majority of U.S. jurisdictions eliminates the most severe occasions for moral risk.

The needs of survivors remain regardless of the cause of death written on the insured’s death certificate. The suicide exclusion clause in most states allows the use of the qualifying phrase “while sane or insane” which means that the survivors of a victim of mental illness resulting in suicide would be denied the same as the survivors of a fully premeditated suicide if the suicide exclusion clause were allowed to be perpetual. Another case to consider is the physician-assisted suicide, now allowed in a small minority of states and foreign jurisdictions. The survivors of a physician-assisted suicide would presumably also be denied if the suicide exclusion clause were allowed to be perpetual. (Unless the survivors could successfully argue that the assisted suicide was in fact murdered by the assisting physician.)

A perpetual suicide exclusion clause would also encourage more gory “public” suicides where the decedent tries to disguise the nature of his or her death. (A suicide committed in solitude is more difficult to disguise.) I don’t know if it is good public policy to encourage hurling onself in front of an oncoming rapid transit train or driving into an abuttment at high speed. Cases are also recorded of skydivers’ failing to use apparently operational parachutes.

While I believe the 2-year suicide exclusion applicable in most U.S. jurisdictions is a reasonable compromise to limit the inherent moral risk in a life insurance contract which otherwise covers the suicide risk, I think other approaches are possible: e.g., in Missouri, I believe the insurer must prove that the decedent suicide planned to defraud the company.

It is possible that a life insurance policy with a perpetual suicide exclusion might be priced somewhat lower than a policy with a standard 2-year suicide exclusion clause. This policy change, however, would reverse a long historical progression toward the ideal of an “all cause” life insurance policy. Foreign travel, war, commission of a crime (including of course suicide in most jurisdictions) and legal execution are all examples of historical exclusions now rarely seen.

However morally repugnant the commentator may find suicide, there are in fact shades of responsibility and many different sets of circumstances involved with this tragic event. I think a perpetual suicide exclusion would do more harm than good.

These comments represent my personal views only and not those of any other person or institution.

2. Pete - May 29, 2008

Hello,

I agree, I think there are some cases where there can be a more responsible suicide, say if the person was suffering and didn’t want to take the family through an 8 month cancer battle draining all money, hope, and energy.

One of the main suicide blockades for someone who is vaguely responsible and over 20 is family / loved ones. Would be extra nice to alleviate that sense of responsibility before committing suicide. Then you can just worry about their embarrassment and whatever else.

I dunno about the responsibility scale and what is within reason, someone more bipolar could be considered ‘suffering’ and feel incurable, and genuinely feel like a drain on loved ones. Could be looked at, from a certain lens, as someone battling cancer.

Anyways stuff to think about, I found that most Term life insurance (Suzie Orman says stay away from) seem to have a 1 year clause, where u have to have it for a year before committing suicide, pretty good deal, wonder if you could pre-pay a year?

3. Jenn - May 29, 2008

I think people are forgetting that much of the time suicide is due to depression which is an illness. The family members left behind still need help financially. Suicide is not a crime….it is a result of an illness. Having just experienced this in my family and watching my mother go through being left with nothing financially but debt is just heartbreaking. We obviously never expected this. Unfortunately my stepfather didn’t have life insurance at all, but I was curious if he had if it would have been valid.

4. Melissa Dows - January 25, 2009

You idiot!!!! People who get life insurance are not those who intend to kill themselves. And people who want to commit suicide are NOT going to wait 2 years to do so. That is why there is the 2 year clause. And besides insurances just take our money and get to do whatever they want with it and hardly pay out to their customers, so if someone dies suicide or not they should pay. The people who are left alive are not at fault, they didn’t kill themselves so why should they be left drowning in debt? Or why should they not receive the money that their loved one paid into. And besides suicide is mostly caused by a mental illness not because of financial issues…..Financial issues may be a catalysts for the illness to come about. DUH don’t you know anything about suicide?????

5. federalist - January 25, 2009

Gosh, I guess not. Maybe I should just go kill myself….

6. Kenneth W. Faig, Jr. - March 2, 2009

One consideration I didn’t mention in my post of January 10, 2008 was the cost of claims investigations. Right now, claims investigations after two years have elapsed are pretty routine: the main objectives being to rule out fraud (e.g., substitute sent for medical exam) or murder of the insured by the beneficiary. If the suicide exclusion were allowed to be perpetual, the cost of suicide claim investigations would offset the pure mortality savings from the perpetual exclusion. There would surely be litigation in cases involving potentially “disguised” suicides (e.g., falling in front of trains, driving car into abutment at high speed). My personal opinion is that the two-year suicide exclusion remains good public policy. I think there has been some trend toward uniformity among state jurisdictions in this regard; that is, fewer states deviate from the standard two-year exclusion than was formerly the case.

7. Henry Spalding - April 22, 2009

I have a life insurance policy that is older than two years old for a large benefit. I think I am going to commit suicide soon so that my family can get out of the hole created by the big drop in income and the fact that my wife is going to leave me and take my son. At least I know he will be taken care of, since I won’t be able to see him anyways while I am alive why not do the deed and leave them better off.

Dr Hangup - November 7, 2009

You don’t know that he will be taken care of.
In fact, in all likelihood, he will grow up completely screwed up and unfit for living his own normal life.
He needs a family not a case full of cash.

Full disclosure: I’m not a Medical Doctor.

8. Kenneth W. Faig, Jr. - May 7, 2009

I don’t think I am competent to engage in a dialog with Mr. Spalding about the intention expressed in his April 22, 2009 post. Sometimes, the psychological impact of the suicide of a loved one on survivors outweighs any financial benefit the survivors might enjoy. I can certainly appreciate that at least some therapists and psychiatrists might support the Federalist’s position that suicide should be an excluded risk during the entire period a life insurance policy remains inforce. Otherwise, the policy can serve as an inducement to commit suicide for depressed insureds who seek to benefit survivors financially. It would be interesting to know the viewpoints of mental health professionals on the life insurance policy suicide exclusion. I suspect at least a minority of these professionals might support the Federalist in favor of a “perpetual” suicide exclusion in life insurance policies.

9. Kenneth W. Faig, Jr. - May 8, 2009

It is a time of change in the world of insurance…with proposals for optional Federal charters floating in the U.S., and the prospect of internationally-based accounting in sight. So changes in the basic structure of the life insurance contract as sold in the U.S. today are not unthinkable.

Thinking about some scenarios:

1. Mandatory exclusion of suicide risk for entire contract lifetime for all contracts issued on and after a specified date.

I think this is politically unlikely. If it were to eventuate, I believe the cost savings for a proposed insured with history free of mental illness or suicide attempts would probably be modest. One potentially beneficial effect would be that some companies might extend offers of insurance to proposed insureds with history of severe psychiatric illness or multiple suicide attempts who would previously not have received any offer of insurance at all. Of course, the beneficiaries of such impaired buyers might never receive any insurance proceeds (other than return of premium) if the insured died by suicide after purchasing such an exclusionary policy. Also denied would be the beneficiaries of an insured free of mental illness or suicide attempts for virtually his or her entire lifetime until he/she committed suicide as a result of geriatic depression in the face of severe illness near the end of his/her life. The beneficiaries of an insured who paid premiums for 50 or more years would be denied under such a “perpetual exclusion” policy if the insured died by suicide.

2. Availability of policies with perpetual suicide exclusion on an optional basis on or after a specified date.

This probably has greater political likelihood, although still not very likely. It’s possible that a few unimpaired lives might be able to get modestly reduced prices under such an optional policy, but of course such insureds still face the risk that their beneficiaries may be deprived as a result of unanticipated late-life suicide. I think the likelier scenario is that optional policies with perpetual suicide exclusions would be focused on making insurance offers to impaired insureds with a history of psychiatric illness or suicide attempts. While being able to buy some life insurance may arguably be a benefit for such persons, a significant number will probably ultimately die by suicide and generate no death benefits for their beneficiaries. One regulatory mechanism to try to address the use of optional “perpetual exclusion” policies as a ghetto for proposed insureds with a history of psychiatric illness or suicide attempts would be to require companies making offers of “perpetual exclusion” policies to make simultaneous offers of “standard 2-year exclusion” policies at the rated price deemed appropriate. Then the insured would have a choice.

3. Availability of optional first-day suicide-included policies on or after a specified date.

Some observers might advocate the availability of such policies for super-preferred risks with no glimmer of mental disturbance in their medical history. However, if the insured is going to pay an extra premium for the first-day coverage, the question the underwriter may ask is why he/she wishes to pay for such coverage. I think a likelier scenario is that such first-day coverage would automatically be included (without option of exclusion) for proposed insureds meeting super-preferred risk guidelines. At least there is less evident anti-selection if this is the case. Nevertheless, one may question such first-day coverage on socio-political grounds: the exposure to moral risk is too great and the discrimination against insureds not meeting the super-preferred risk criteria too severe.

My Conclusion:

All things considered, I still think the “status quo” is a reasonable compromise. Nevertheless, it remains the fact that covered suicide remains a “moral hazard” in life insurance and that a policy containing death benefits for suicide (even with an initial exclusion period) may become an inducement for performing the act. The issue certainly deserves the discussion which The Federalist afforded it.

10. federalist - May 8, 2009

Mr. Faig,

Thank you for your insightful comments.

One point I would dispute with you is whether late-life suicide is a risk against which insurance should be provided. I have never heard a good argument in favor of whole-life insurance; if people want to leave an inheritance then they should create revocable living trusts (or more sophisticated estate management vehicles if their value is significant). If they need to insure their dependents against the loss of their provider then they should buy term life insurance.

That said, since whole-life policies are a combination of savings and insurance it would not be hard for an insurer to permanently exclude suicide coverage but to still pay out the accrued savings component (which is the majority of a whole-life policy value in later years) in the event of a late-life suicide.

11. Kenneth W. Faig, Jr. - May 8, 2009

Dear Federalist,

You’re correct that (laws and regulations permitting) a life insurance policy could pay a more generous benefit for suicide than return of premiums without interest: e.g., in year 3+, the death benefit for suicide might be equal to the reserve or cash value.

I’ll step aside from the perm vs. term debate. I think it depends upon individual circumstances.

I wonder if there is any psychiatric literature on the life insurance policy and suicide. Such literature could make an important contribution to any debate as to the proper structure of life insurance benefits for death by suicide.

But it’s time for me to let others have their say in these matters!

Regards,

Ken F.

12. Kadin - September 8, 2009

I don’t really see the moral hazard here. In part because I’m just not totally convinced by the data, but in a larger sense because I don’t think that suicide is necessarily immoral.

Suicide as a result of mental illness (and depression is a mental illness) is a tragedy, and there’s probably an argument that can be made that we don’t deal very well in our society at recognizing or treating the early signs of mental illness–especially in young people–before they become severe. There is still a stigmatization of mental illness in many communities that causes people to delay or avoid treatment, and this is something we should be taking a hard look at. When an otherwise healthy, productive person kills themselves as a result of mental illness, it’s a huge net loss.

However, it is the right of all people to choose to end their lives if they wish to. Frankly I do not think that a society that criminalizes suicide can really be called “free” in any non-hypocritical sense. Not all suicide is the result of mental illness; there are many reasons why people may decide at some point in their lives that death is the most honorable, graceful, and least burdensome path for themselves and their loved ones. We should not second-guess this choice when it is made by a sane, sober, and rational person.

You do not need to like the idea of suicide or want to do it yourself to realize that it is an option that ought to exist for others. The price of freedom is letting other people do things that you think are, at times, inadvisable or even reprehensible, when they do them to themselves. Although I do not think that it is our place to encourage people to commit suicide, it is not our place either to discourage them from doing it, which is what mandating a suicide exclusion clause would do.

Forcing insurers to exclude suicide would encourage people suffering terminal illness to die slowly rather than being able to freely choose to end their lives, if that is what they wish. Again, you don’t need to like their choice, or think that it is a good choice, to respect that they should have the ability to make that choice. That’s what freedom means. We should never force suicide on anyone, but we should never force a slow death on anyone, either.

The laws as they stand are fine. I suspect that death is just fine as a disincentive towards those who would commit suicide with the intent of insurance fraud.

13. federalist - September 8, 2009

Kadin: “Moral Hazard” is an economic term, not a normative one. In this case we are not talking about the morality of suicide, but rather about the risk that either:
1. Somebody intent on committing suicide exploits life insurers by taking out life insurance. Since they cannot know his intent they can’t charge him the fair price of the insurance.
2. The fact that an individual owns an insurance contract that pays out immediately on suicide increases that person’s incentives to commit suicide.

The laws as they stand require everyone who wants life insurance to subsidize fraud in the first case, and adverse incentives in the second.

14. Jackson Browne - August 19, 2010

If you are killed in a criminal act, does insurance pay,

15. federalist - August 19, 2010

IANAL, but since suicide itself is a criminal act I would expect insurance to pay upon death resulting from other crimes that inadvertently resulted in death.

16. Kurt Cobain - September 1, 2010

Sod off you wanker!!! Me family needed the insurance proceeds.

17. F you - January 14, 2011

I’m sorry that you don’t care what the family has to face after their loved one commits suicide, would you rather them have to take on the full financial responsibility? Do you even realize that suicide entails so much more than just financial incentive? There is no right or wrong, its just someone who is ill, and needs help, suicide is the result not the cause.
Don’t attack something you don’t fully understand.

18. Ross H - November 24, 2012

Suicide is NOT a criminal act in the United States and many other western nations; however; in some states it is illegal under common law, which can hinder civil lawsuits related to negligence or malpractice (as in a prison or hospital). Assisting in suicide is a crime, but not for the individual who has committed suicide.

19. colleen - June 21, 2013

im british and I would commit suicide as a last resort for debt but however I love my family I wouldn’t want to leave them but I also don’t want them to suffer for my mistakes so if an insurance policy paid out for suicide id buy it

20. federalist - October 2, 2013

Shoot, I should have saved a copy, but can’t find it. I’ll host it if anyone finds it.

21. Mike Burton - October 3, 2013

I looked for it and sent an e-mail to the webmaster at the University of Chicago. Thanks for checking. If I find it, I will circle back to you. I did find a bunch of other links/articles with not-too-dissimilar information. If you want them, shoot me an e-mail address and I’ll forward them to you. My e-mail is provided above! Peace!

22. Mike Burton - October 3, 2013

Why not just provide them here? Here are some of the references I found for research I am conducting:

http://www.latimes.com/local/la-me-life-insurance-military-20130909,0,2402011,full.story

http://nccuir.lib.nccu.edu.tw/bitstream/140.119/50324/1/ = Life Insurance and Suicide: A Test on the Existence of Asymmetric Information

http://psycnet.apa.org/journals/cri/31/4/217/ = Assessing the impact of suicide exclusion periods on life insurance. Yip, Paul; Pitt, David; Wang, Yan; Wu, Xueyuan; Watson, Ray; Huggins, Richard; Xu, Ying Crisis: The Journal of Crisis Intervention and Suicide Prevention, Vol 31(4), 2010, 217-223. doi: 10.1027/0227-5910/a000023

An Extensive Bibliography of Suicide & Economics: http://www2.e.u-tokyo.ac.jp/~scd_proj/referencesWithLink.html#Insurance

Mike

23. federalist - October 9, 2013

Ah ha: found the original paper at web.archive.org! Link to my hosted copy now used in the original post. (Original URL: http://home.uchicago.edu/~htseng/lifetseng.pdf)

24. Mike Burton - October 10, 2013

That link didn’t work for me directly . . .but I banged it around a bit and found it. Hopefully this is the right link: http://web.archive.org/web/20060915032211/http://home.uchicago.edu/~htseng/lifetseng.pdf. Thanks again for your help and following up. Really helpful!

25. R. dreyfus - November 17, 2014

My friend is discouraged from purchasing life insurance because of his history of depression. He would gladly have a perpetual suicide exclusion in order to get an affordable rate. Is it possible to know which states allow this?

Michael Burton - November 17, 2014

It wouldn’t matter if states allowed this . . . because there are no policies available that way, anyways. At least none to my knowledge.

It’s a big deal, IMHO. And if it weren’t for the fact that insurors were paying death benefits to beneficiaries, I would expect there to be many lawsuits. Instead of getting sued, the life insurance companies are getting thanked.


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