What’s an offset clause?
[social_share]An offset clause in a life insurance policy is a clause that allows the insurer to offset a gain against a loss.
This is most often used if the life insurance policy also covers against disability or a general inability to work. In such a case, the insurance company may not pay out the full amount if the policy holder is judged able to work at all. Instead, the insurance company will offset the payout by the amount of the policy holder’s new salary, even if it’s at a much lower pay scale than his or her previous position.
In many such cases the offset clause will limit the insurance payout if the policy holder could get a job, so that he or she does not have the moral hazard of not getting a job just to increase the insurance payment. Some insurance companies have a partial offset, and sometimes there’s a threshold.
An offset clause can also apply when compensation is paid by a third party. For example, if the policy holder loses his or her life in an accident and the other party to the accident pays a certain amount in compensation, then that sum can be used as an offset by the insurance company.
An offset clause must be in the insurance contract for it to be legal. If the clause is not in the contract, it cannot simply be applied unilaterally by the insurance company. There is a presumption that the insurance policy will payout in full if there is no offset clause in the contract.
Insurance policies with offset clauses can be considerably less expensive than those without them. The aim is to establish a certain minimum level of comfort following a disability or general inability to work, rather than receiving the maximum payout possible. However, the policy holder should be very clear as to whether he or she actually wants a life insurance policy with an offset clause. It will often be the case that it is sensible.
However, there should be some care taken if the policy holder carries more than one insurance policy. There may be an impression that the person is paying for two life insurance policies when in fact they are only paying for one, which is essentially the effect of an offset clause.
