A Life Insurance Mystery: Underwriting

November 13th, 2018 No comments

At this point, I should really stop being surprised that consumers tend to focus more on issues that aren’t particularly consequential and often ignore the most important matters. This has been reinforced recently on a few engagements.

One of these issues is underwriting, maybe the least favorite part of the life insurance process. While it’s important to do business with a strong carrier—and no one wants to pay more for something than necessary—the details of the underwriting process are a mystery to most.

Mortality Pricing

In the market today, most carriers have risk classes such as Preferred Best, Preferred, Standard Plus and Standard, before applying increased mortality pricing in the form of Table A, B, C or 2, 3, 4, etc. This additional mortality pricing equates to 125 percent, 50 percent, 200 percent, etc. of standard mortality pricing, and it’s used to underwrite risks where longevity is threatened by poor health, lifestyle issues or dangerous avocation. Build (that is, height and weight), labs results (e.g., blood and urine samples), health issues, disease, driving record, family history, foreign travel and sky diving are all examples of things that might kick someone out of a better class and down a rung or two or 10. Someone at a Table 10 is going to pay a lot more than at preferred rates but it may be worth it to the individual to have coverage.

Niche-Oriented Market

Why is this so important? Because the market is incredibly niche-oriented. Various insurance carriers don’t necessarily look at all risks the same. Sometimes you provide the staging, grading, timing, treatment and follow-up of a certain cancer, and every carrier seems to turn to the same page of the reinsurance manual and give you the same Table 4 offer. Other times, the responses are all over the board.

One carrier might be more aggressive with diabetics or sleep apnea, one for psychological issues, another for an abnormal ECG and another if your client is only a few years out from a DUI or likes to scuba dive on vacation. The issues and the responses are endless. Does your client understand the varying niches of the players in the market? Of course not. Do you trust the agent to search the market for the best fit? Maybe.

Different Perspectives

A few years back, I was working for a client on a large case, and I ended up underwriting the file with full medical records with 13 different carriers. When the results came back I had a few declines, some very high ratings, some modest ratings, a few standards and a preferred best. Really! All based on exactly the same information. Clearly, the preferred best was an aberration but more than one carrier was willing to go standard. This was a very different perspective of risk by various underwriters. Did I even really care if the preferred best was because the underwriter wanted to leave the office on time to get to a grandchild’s recital and went through the file quickly? Not unless this is how all files were underwritten, and adverse mortality would come back to haunt the company.

We took the preferred best, as well as a couple standard offers for diversity, and put together a wonderful portfolio. What if I went to only a few carriers and got only the less attractive offers? Many people would conclude that was the market response and choose from the poorer options.

Here’s another. I was called in for an analysis on a policy that was part of a larger deferred comp program. One of the many policies in force was rated at Table 4, which is 200 percent mortality pricing. You should understand that almost the entire portfolio was with the same agent and carrier, a large career office where alternatives are rarely brought to the table. I helped them bring the insured back to market and got them a standard offer with another quality carrier, saving them a significant amount of premium dollars.

Squandered Dollars

How often can this happen? More often than you may think. The dollars squandered on worse-than-possible underwriting can be very meaningful, easily tens of thousands and hundreds of thousands or millions of dollars in larger case situations. Furthermore, policies initially underwritten unfavorably can often be rewritten more favorably down the road and sometimes with the same carrier without incurring all new expenses. I’ve seen individuals who are years out from a cancer or cardiac issue who could get much more favorable offers today. People lose weight and start exercising. Driving records are now clean. However, once a contract is in place, it’s usually forgotten, and even someone who stopped smoking and could see premiums drop precipitously, often keeps overpaying for years.

Is Something Better Available?

The moral here is not to blindly accept an offer when something better may be available. In many situations, your client may only get so good an offer, and an objective resource can help everyone understand if the offer on the table is decent. In my case, a $1 million permanent, guaranteed policy would cost $10,000 at preferred and $12,500 at standard. Assume I apply for preferred but obtain standard pricing with the carrier I was formally underwritten with. When looking at the range of pricing with various players in the market, the highest cost preferred option is still lower than standard pricing with most other carriers. This means that any carrier that would offer me preferred might be a better deal than the standard offer on the table. What’s the chance someone who understands underwriting and the market can get the preferred? Better than you might think. Also, if I’m going to end up being standard with every carrier, I shouldn’t assume that the preferred pricing with the competitive carrier I applied to is still as competitive in the standard range. Again, the market is incredibly niche-oriented and the carriers are very specific in their targeting. While I’m the last one to advocate for shopping coverage for the cheapest rates, if the offerings are apples to apples, why would I pay more than I need to?

While I don’t want to throw anyone under the bus, there’s also a perverse incentive for an agent to move forward in placing the standard or rated offer if possible. A preferred offer is generally going to result in a lower commission than a less favorable offer.

Everything described here is quite commonplace. I recently wrangled a standard non-smoker for a marijuana smoker when the first carrier he was underwritten with was going to heavily rate him. The same goes for a airline pilot or a gentleman on anxiety medications or a woman traveling overseas. The scenarios are endless. This also plays into my thoughts regarding agents who work for a specific insurance carrier. While I don’t think it’s inappropriate, I don’t understand any appeal of working with an agent who has a specific insurance company name on the business card. Sure, they often offer a nice story about how they can bring other carriers to the table but that’s too often only done if absolutely necessary to place a case rather than lose it.

Understanding market niches and carrier specialties and how to work with the various insurers is a very important consideration when procuring life insurance. Bottom Line: If I was initially gunning for a preferred offering, would I ever choose to pay 25 percent more without doing a little digging for a more favorable option? With $100,000 of premium savings at stake, even in this modest transaction, isn’t it worth it?

Bill Boersma is a CLU, AEP and LIC. More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com or email bill@oc-lic.com.

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Premium Financing Life Insurance in Today’s Markets

October 25th, 2018 No comments

Our clients don’t understand insurance crediting.

In the past few weeks, I’ve received more calls than usual regarding consulting and analysis for existing or proposed premium financing transactions. They’re coming from attorneys and accountants as usual, but from more family offices than ever.

Some of these calls will involve deep analysis, and in some situations, I’ve been able to have the proposals emailed to me for a quick once-over. While I’m committed to entering every situation with an open mind and free of prejudice, sometimes, at a glance, the result is self-evident. For full post, click here…

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Time Bombs of Yesteryear and Today

October 16th, 2018 No comments

This past month, there was an article on the front page of a major publication about universal life (UL) insurance policies. The article included a statement that many people “… are sitting on a ticking time bomb, and most probably aren’t aware of it.”

This reminded me of another article that said, “Today, in this period of very low interest rates, many are sitting on time bombs… Yet many are unaware…” Guess when this period of very low interest rates was? 2002! How many times since then would someone have killed for a 2002 interest rate? For full post, click here…

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Life Insurance Analysis: an Art or a Science

October 8th, 2018 No comments

DECK: Is it worth taking an undue risk to save a few bucks? 

Earlier this year, I was introduced to a policy owner by his estate-planning attorney regarding the evaluation of a survivor life policy on himself and his wife.  It was a $1 million 1995 universal life contract that was underfunded due to decades of decreasing crediting rates.

Fundamentally, he wanted to know how the policy was doing, what it would take to firm it up and if the recommendations he’d received three years earlier from a nationally recognized life insurance consultant were correct. For full post, click here…

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Letters Of Explanation – Policy Funding Options

September 24th, 2018 No comments

Dear Mr. Client:

It was a pleasure to speak with you last week and I appreciate the opportunity to review your life insurance policy. Per our discussion, this note is intended to be a follow up summary of our conversation. If there is any additional information you were looking for which I have forgotten to include, or if you have questions about what I have written, please do not hesitate to get back with me.

Your $1,000,000 was originally an Alexander Hamilton policy which was acquired by Jefferson Pilot and subsequently merged with Lincoln Financial. Though I do not have the original sales ledgers, the original premium of $13,750 was likely calculated to maintain the policy indefinitely given the interest crediting and expenses assumption in play at the time the policy was issued in 1995.

Since that time interest rates have come down significantly; probably 300 basis points or more. For full post, click here…

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A Life Insurance Carrier Offer Your Client Can’t Refuse?

September 18th, 2018 No comments

Last week, I was contacted by an agent with whom I’ve had a long-term relationship regarding a question from a client. The client is a gentleman who’s the surviving insured on a $1 million second-to-die policy and he’s very old. His policy has little cash value and it may or may not last as long as he will without throwing a lot more money at it. In fact, next year the policy has no cash value and it’ll lapse in four years.

What initiated the call was something the client received from the carrier. It was an “Enhanced Cash Surrender Value” opportunity. The bottom line is that the insurance carrier is offering the policy owner a chance to surrender the contract for more money than the cash surrender value and, in this case, more than the gross policy cash value. For full post, click here…

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Letters of Explanation: Donating a Policy to Charity

August 16th, 2018 No comments

Good Afternoon:

It is my pleasure to be introduced to you.  Your accountant referred you to me because of the frustrating, yet required process when donating a life insurance policy to a non-profit.  I understand it is not pleasant to hear you won’t be getting the deduction you were expecting for your policy donation to the school but the process I will bring you through will get you everything you are entitled to.

Unfortunately, your cash value is not the number the IRS looks at when taking donations into account.  To think about it in a simplistic way, they aren’t eager to let you take a deduction for something you have never paid tax on.  In other words, the special rules which allow your life insurance cash value to grow tax free is what is preventing you from fully deducting that same cash value. For full post, click here…

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Life Insurance Premium Financing

August 15th, 2018 No comments

It’s too often improperly presented, implemented and managed.

I’ll start out by saying that I’m not opposed to premium financing. I’m simply a strong advocate for making sure it’s understood and done right. That being said, many of these proposals are not understood and can be misleading.

Fundamentals of Financing

First, it’s a good idea to look back to the general fundamentals of financing. Financing comes into play when someone needs or wants to purchase an asset of something but doesn’t have the money or the liquidity to pay the entire purchase price. Financing fills this void, not to get something that’s otherwise unaffordable.

We do this day in and day out. We finance our homes, cars, businesses, equipment and more. Generally, we can afford these things but the money isn’t readily available. Additionally, we often finance things we do have the money for if the financing provides a positive arbitrage to be taken advantage of. For full post, click here…

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Letters of Explanation – Trustee Liability

July 31st, 2018 No comments

This letter is to the management of a law firm.  Multiple attorneys act as trustees for clients.  There has been no program of management regarding these policies and I was called in to suggest a plan.  I was also able to look at redacted policy information and could see at a glance that many policies are underperforming and headed towards failure.  A decision was made that the attorneys deal with it on a case by case basis as they see fit.  I see this as a grave mistake.

Dear Firm Management:

It’s been a while since we’ve talked and the last time we did you mentioned the attorneys who are acting as trustees will be deciding independently on how to proceed.

I understand this but as we discussed earlier, if things go wrong (which they have and will) and result in a lawsuit, case law has shown that an independent third party is critical to a successful defense.  I am currently involved in four litigation support and expert witness cases, some going after trustees and some defending trustees. For full post, click here…

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Letters of Explanation: Whole Life Term Blend

July 25th, 2018 No comments

This letter is to a client explaining why the term blended whole life policy on his mother is failing:

Dear Mr. Client:

Unfortunately I still do not have what I requested from XYZ Life but I was able to do some work anyway.  Also, what I requested may end up being sent directly to the policy owner, which is you as trustee, at the address of record.

You had asked about potential income tax consequences regarding this policy and I believe there would be none as it looks like the gross cash value is less than what I calculate the basis to be in the contract.  I am waiting on a formal basis and gain calc from the company. For full post, click here…

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