Life insurance applications for tens of millions of dollars – sometimes much more – are commonly purchased to secure a large loan, to facilitate the transfer of a business, or to pay death taxes.
Individuals who have these needs are often ultra-busy business owners or executives who prefer to focus on growing their companies rather than spend time applying for life insurance. While it is certainly possible to apply for very large amounts of coverage with just one insurer “to get it over with,” doing so can inadvertently introduce avoidable pricing risk. A strategic sequentially layered approach to applying for coverage at several insurers may yield better results. Consider the following scenario:
- Applicant: Business Owner, M, 47, non-tobacco, appears in great health
- Insurance Need: $60M term life insurance to fund a buy-sell agreement
- Goal: Acquire 3 $20M policies to diversify coverage & have conversion flexibility
- Insurer A: Requires an EKG
- Insurers B & C: No EKG required
Unlike Insurer A which relies on a current EKG to assess cardiovascular risk factors, Insurers B & C rely on a lab test (Pro BNP). They do this for two reasons: (1) a lab test is more convenient for the applicant; (2) it’s easy to administer, quick to interpret, and costs less.
While unfavorable lab results are possible, for the relatively young applicant in our example, the underwriting risks introduced via an EKG are greater. Arrhythmias, inverted T-waves, and other common asymptomatic EKG abnormalities can lead to underwriting delays, complications, premium increases, or even declined applications.
Given the above, a more conservative approach to underwriting involves three sequential steps:
- Apply for the most amount of coverage with the least amount of testing
- Accept initial offers by placing the policies in force via premium payment
- Secure additional coverage by ordering an EKG after 2. is completed
This strategy works because life insurers cannot change existing policies based on adverse test results developed after a policy has been put in force.
In our example, if a conservative approach to underwriting is desired, the first step would be to apply for $40M coverage, $20M each with Insurers B & C. Assuming a favorable outcome, $40M of coverage can be locked in before ordering the EKG required by Company A. If the new EKG raises previously unknown concerns, at least $40M coverage has been secured at the lowest possible rates!
Having to go back for an EKG is an inconvenience. But sometimes a bird in hand is better than two in the bush. Significant premium savings can be realized with the more conservative approach to underwriting. An informed applicant is in the best position to balance convenience with pricing risk and decide on the most appropriate way forward.
If you’d like to brainstorm underwriting for one of your important applicants, drop me a note. Let’s put our heads together and strategize what makes the most sense, based on what your client is trying to accomplish.