I often find myself jealous of my colleagues that focus on the asset management part of the business. While their proposal and analysis work are no doubt difficult and require great care and skill, the transition from the design phase to implementation is usually seamless: “We’ve discussed your objectives, provided several options, agreed on the final proposal, now please sign here, initial there, date everything and the funds will transfer over in three-to-five days.”
In the life insurance acquisition cycle, this is where the hard work begins. Once the framework of a design is formed, we now have to medically qualify to obtain the coverage. Unlike our friends in the asset business, the life insurance client must present a full, detailed medical history and ask for the life insurance provider to deem them healthy and worthy of purchasing their product.
The local professional basketball team in Philadelphia built the core of their team through a multi-year strategy of essentially losing games to acquire assets through high draft picks. The architect of this organizational ‘tanking’ was then-general manager Sam Hinkie, whose loyal fans adopted the phrase “Trust the Process” as a way to deal with years and years of poor play and lots of losing. (For more basketball discussion, please visit my other blog: “The Knicks – We’re Julius’s Team Now!”)
For the best client experience and outcome, the mantra for underwriting isn’t “Trust the Process” but rather “Manage the Process”.
What to Expect in Underwriting
Expect the medical qualification process to be invasive and to require multiple steps over a period of time. Clients should be aware at the onset that their medical history is going to be scrutinized and that, perhaps, personal and uncomfortable questions will be asked.
The traditional underwriting process consists of:
An assessment of the applicant’s medical history (including family history) through a brief questionnaire and collection of pertinent medical records;
An insurance specific exam, including blood and urine samples, physical measurements, and another medical history survey;
A review of available databases, including a Motor Vehicle Report (MVR), Medical Information Bureau (MIB) and prescription database.
After this initial assessment, there may be additional clarification or supplemental information that may be required in order to finalize the underwriting offer. The underwriter’s primary directive is to manage the risk assigned to the insurer. Given this position, any partial or incomplete answers and/or vagueness in a situation will usually prompt more questions.
Why is Underwriting Important?
Because it determines if you can acquire coverage and, if so, how much your policy costs.
Life insurance products are priced based on expected mortality – in order for the issuer to set the appropriate rate, they need to determine the likelihood of an insured living to or beyond expected mortality. Each individual that goes through the process is assigned to an existing medical risk class based upon their medical and social history, which in turn determines the cost for insurance.
Historically, the two underwriting classes where “Non-Tobacco” and “Tobacco”. Today, most insurance companies offer a more segmented risk diversification ranging from 3-4 non-tobacco classifications Standard or better and up to 10 “rated” risk classes. The benchmark rate class is Standard Non-Tobacco, which roughly translates to average health and normal life expectancy.
Individuals with excellent health with no family history issues are able to obtain rates that may be up to 50% (depending upon product and face amount) less expensive than Standard Non-Tobacco.
Individuals with health impairments that indicate a mortality less than normal life expectancy are still able to acquire coverage, but at a greater cost. In general, each rate class translates to a 25% increase in cost compared to Standard Non-Tobacco – a Table 3 Non-Tobacco rating would be 75% more expensive than a Standard Non-Tobacco rating.
Not only does traditional underwriting require commitment and engagement from the proposed insured, but it is expensive – in real dollars and time – for the issuing company. Prior to and accelerated by the pandemic, the industry is innovating with technology to streamline the application process.
Several highly rated carriers have released and upgraded the ability to apply (with age and face amount limits) for coverage electronically. These platforms allow the applicant to complete a ‘smart’ medical history questionnaire which is then run through a background algorithm to produce either a risk classification or redirect the file to traditional underwriting. Once reviewed by a live person, the outstanding requirements may be full underwriting – including an exam and collection of medical records – or simple clarification or request for additional information.
In our practice, we’ve positioned the electronic application process as a potentially favorable path to eliminate some aspects of the traditional application method, but note to clients and their advisors that the case may be referred to underwriting for situations big and small. We’ve had situations where a case needed additional underwriting to clarify prescriptions that were missed (or forgotten) when the applicant’s responses were matched to the prescription database. Unfortunately, there’s no way to be certain what causes a case to be ‘kicked out’ until the application is submitted and reviewed.
As the technology improves and insurance companies have more data to evaluate (comparing outcomes of the algorithm to traditional underwriting), we anticipate that convenience and speed of an accelerated electronic process will continue to spread throughout the industry.
In last year’s Philadelphia Estate Planning Council Fall Newsletter, I wrote an article outlining the impact of COVID-19 on the life insurance industry (https://www.1847pcg.com/single-post/the-impact-of-covid-19-on-the-life-insurance-industry). Immediately following the outbreak, significant and abrupt changes were put in place as the market attempted to decrease risk in an uncertain time. Later in the year some of those restrictions were removed, and as the world begins to return to “normal”, we expect to see underwriting guidelines and programs return to pre-2020 status.
As of the time of this writing, most providers in the market place are still limiting sub-standard cases to a Table 4 and increased foreign travel restrictions remain intact.
Medical underwriting is the key point where the structure and design of an insurance strategy goes from hypothetical to actionable; most independent insurance professionals have access to the same products and pricing is the same across the industry. Having a client obtain the best available underwriting for their situation is where the insurance advisor delivers the most value.
One of my favorite quotes when dealing with an imperfect and unanticipated underwriting situation is from the poet, philosopher and pugilist, Mike Tyson: “Everybody has a plan until they get punched in the mouth.” Along with the nuances of presenting unfavorable news to a client, a negative outcome during underwriting may significantly impair or eliminate certain design elements. This can be somewhat mitigated during the design phase by stress testing the impact of less favorable risk classes on the strategy and developing solutions – increasing premium, reducing duration of illustrated coverage, decrease total amount of coverage, change product, etc. – so that an alternative is still viable.
It is often more important how the information is presented rather than what is in the medical history. As I mentioned early, underwriters are trained to identify inconsistencies or lack of details and focus additional questions on that area. More often than not, the presence of uncertainty will trigger additional examination in excess of what may have been required if the issue was presented in a complete and understandable way.
Submitting a cover letter that addresses any potential issues may greatly reduce both the time and touches of the underwriting process. Addressing the concern and positioning the positives of the situation can dramatically change the light in which the issue is viewed.
Practical medicine and life insurance qualification are different things. An attending physician makes recommendations based on their opinion of the best holistic treatment of the patient; life insurance qualification is an assessment of risk. Your personal doctor may suggest monitoring or using active surveillance for a condition instead of an immediate and perhaps invasive procedure; the underwriter is compelled to evaluate and consider the multiple different potential outcomes. There is work being done that may make individual-specific rate classes a reality in the future, but at this time each applicant is sorted into the category based upon the mortality experience of the manual’s population. While the medical plan is tailored specifically to the individual, the risk assessment is still compared to the general population.
The underwriter reads what is on the page without the benefit (or hinderance) of the tone of the discussion between doctor and patient. While medical professionals tend to document everything that is said (also something to keep in mind if in the past you’ve made what you thought of as an offhanded comment in the examination room), there may be a gap between what the patient thought they heard and what the facts of the case may be.
Involving the attending physician – either before underwriting begins or as a way to bring clarity to a situation – is an example of actively managing process.
Engaging an informal, non-binding underwriting method has several advantages that should be considered. Historically, underwriting is completed after a formal application has been submitted, which means that insurance is one of the few items you try to buy before knowing the price. The informal process allows for the applicant to be considered based on their medical history and the insurance exam. This provides an indication of potential risk class subject to the verification of the database searches; unless something significant appears that contradicts or was not disclosed the informal offer is generally actionable.
This informal route is also an efficient means to engage several carriers to collect multiple offers. In some situations, carriers may be willing to make “business decisions” to be more aggressive in rating a case depending upon the amount and structure of the design; this flexibility is usually limited to their retention limits, which eliminates the need for facultative underwriting by their reinsurer. (Quick primer: reinsurance is like insurance that the insurance company buys so they aren’t on the hook for the full risk.)
Informal underwriting is preferred path when there are known medical risks and/or if additional planning, e.g., creating a Trust, is necessary for the sole purpose of the insurance design.
Medically qualifying for life insurance is a detailed and extensive process that requires engagement from the clients. Proactively managing the process and client expectations will not only result in a better experience for the consumer, but will ensure their plans gets executed with better financial results.
Michael C. DeFillipo, CLU®, ChFC®
Partner, 1847 Private Client Group
161 Washington Street, Suite 700
Conshohocken, PA 19428