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?
Originally posted on WealthManagement.com Nov 01, 2018
