How do actuaries define risky habits?

For customers, life insurance is about reducing risk: You get coverage so your family is financially protected if you die, thereby removing some risk from your life, and providing everyone with a little peace of mind.

For a life insurance provider, however, life insurance is about taking risks, and in this case the risk is you. The insurance company accepts that you might die during the term of coverage, which would cost them money. Actuaries do their best to perform a risk assessment and calculate the probability of your untimely demise, and charge you accordingly in terms of insurance risk. (More likely to live = lower premiums.) When assessing your survival prospects, insurers consider a range of easily understood factors like age and health, along with the murkier concept of whether you engage in “dangerous activities,” which you might have noticed when applying for a term life insurance policy.

So what are those activities, and how often do you have to engage in them to be considered “risky”? And how does that impact your coverage? Also, if you want to go skydiving and you want reasonably priced life insurance, what should you do?

We put these questions to the head of underwriting solutions at Haven Life. Here’s what we found out.

What do insurers mean by “risky”?

Across the insurance industry there is broad agreement that certain activities are hazardous. They include (but are not limited to) scuba diving, mountain climbing, skydiving and vehicle racing, but each company assesses risk a little differently. Insurers use a mix of statistics that apply to the whole population (what percentage of rock climbers die per year, for example) and also their specific company’s experience of past claims. If your insurer has made a lot of payouts related to stock car accidents, they’re likely to charge racers more for coverage.

Lists of dangerous activities are updated as trends change: Twenty years ago, no insurance company would have asked about parkour (which can involve jumping between buildings), but now some do. At Haven Life, application questions include an “avocation” (hobby) section, which is evaluated every few years. A team of risk specialists keeps an eye on new trends in hazardous sports, and in the industry at large. Recently, Haven Life added skeleton and luge to our bobsledding category (yep, there was already a bobsledding category — blame Cool Runnings). Haven Life also updated language around rock climbing (to clarify that it’s primarily concerned about outdoor climbing) and big game hunting (to clarify that it’s primarily concerned about trophy hunting).

What do you need to know about risky habits and hobbies?

For insurers, a key consideration with any risky hobby is how often a prospective customer practices it, and at what level. When you apply for coverage, you’ll be asked if you have participated in certain activities in the past three years, or plan to do them in the next two. Underwriters take the specific details into account. If you’re into motorcycle racing, they’ll consider what kind of bike you have, what kind of racing you do and how often. If you’re a professional scuba diver who spends half his waking hours in deep water, you’ll pay more for life insurance because there are potential risks associated with this hobby. If, on the other hand, you occasionally dive with a buddy in relatively shallow water while on vacation, that probably won’t affect your insurance premium. That’s one reason why honesty is important when you apply for life insurance: It might save you money.

The other reason is that, frankly, if you’re less than honest, there’s a chance you’ll get caught. (After you’ve died, which is awkward.) Take the example of rock climbing. If you die while climbing, your life insurer will check whether you climbed regularly, when you started doing it, and whether you told the insurance company about it. If you were a serious climber when you got your policy, and you told your insurer about it, there’s no problem (apart from the fact that you’re, well, dead). If, however, your insurer finds out that you didn’t tell them about your habit of scaling mountains without a rope, or that you didn’t mention you had a trip up El Capitan planned when you signed up for your policy, there could be problems with your payout.

The above is especially true during the “contestability period” — the period of time right after you get your policy (typically the first two years). If you die during this time, a life insurance company will, as a matter of course, check to see if you made any false claims when signing up for your policy.

It’s worth noting that none of this restricts your life or obliges you to know everything about what you’ll do in the future, although it sounds like it might. For example, if someone reports limited participation in a dangerous hobby on their application, then dies participating at riskier levels (such as someone who reported they dived only to 100ft and then died in a dive accident below 100ft), a special investigations team would be involved to evaluate the claim. If they found that the client had been truthful about their past participation, there would be no grounds for misrepresentation and the claim would be paid. Only if they found that the client had misrepresented their participation prior to the policy going in force would the claim likely not be paid.

How could my hobbies affect my premiums?

The extent to which participation in a dangerous activity might increase your premiums varies from person to person, but the way you’ll be charged is fairly standard. If you are, say, a keen heliskiier, an insurance company might just give you a higher overall premium than your less adventurous friends, or they could add what’s called a flat extra — an additional charge related to the risky hobby. If a customer has a flat extra, many insurance companies will consider removing it in the future if the customer has quit the dangerous activity for at least two years and has no plans to return to it in the future.

When do I need to notify my insurer about risky activities?

Life insurance is about safeguarding your family’s future, and when underwriters consider your participation in dangerous activities, they’re also looking ahead: They’re mainly concerned about what you’ll do going forward. If you used to spend each weekend base jumping but you gave it up years ago when you had kids, that won’t affect your premium, as long as your time hurling yourself off cliffs really is in the past.

But what if you had no plans to do anything dangerous when you signed up for your policy, but then you subsequently decide to become a professional skydiver? (Hey — it could happen). In that case, perhaps surprisingly, your coverage likely won’t be impacted, even during the contestability period, when all claims are automatically investigated. If you die doing a hazardous activity and a life insurance company looks into the claim, the investigation will aim to establish whether you should have known and disclosed that you planned to engage in a risky hobby at the time your policy was being underwritten. In other words, if you had no intention of going near an airplane when you signed up for life insurance but, a year later, you rewatched Top Gun and decided to go get your pilot’s license, your coverage wouldn’t be affected.

So the bottom line is this: As far as your life insurance provider is concerned, you should do what you like, now and in the future; just be straight with them when applying for your policy so that any insurance risk is accounted for. That way, you can engage in all of your hobbies while knowing that the financial risk to your family has been taken care of as much as possible.