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Today we are talking about a very important aspect of insurance underwriting. So as everyone quits listening at that point…no seriously hang in there to the very end and we'll reveal something super secret!
No really, there's no big secret but we promise to make this an interesting episode.
This is one of those topics that we should have covered in the first five episodes and/or blog posts but we didn't. And we are attempting to go back and right the wrongs of our past.
In this episode, we're going to talk almost exclusively about underwriting. Specifically life insurance underwriting.
There are the various risk classes that exist–preferred plus/super-preferred, preferred, standard plus, standard and all the way down the table ratings. So, you've probably seen the commercials on television that tout being able to insure a 35 year old male at $1 million for only $22/month or something like that right?
Of course if you read the fine print, you will see that is for a super-preferred/preferred plus rate (a rate that is difficult to qualify) for a 10 year term policy (a policy that has very short term). The rates the quote are real and are no doubt the published rates for a 35 year old male, non-smoker at the super-preferred rate class.
So…that's not so bad is it?
On the surface, no.
However, here's the truth…almost no one every qualifies for that rate. In fact, most of the companies that quote very low rates at the highest rate class, have very little intention of issuing policies at that rate.
It's a classic “bait and switch” that we've talked about in the past.
Standard just means you are normal
There have been many times where we have an insured come back after underwriting with standard rating. Now, this doesn't mean that you are in some way unhealthy or more likely to die at an early age. It just mean you're normal.
That is to say if your life expectancy is 85, the underwriter at XYZ life insurance company thinks you are likely to live to your life expectancy. To be considered a preferred risk or rate class, you would have to be assessed as someone who has the probability of living longer than normal. That's it.
It's not an indictment on your health or your character in any way, it just means that based on all the factors that are taken into account, you are likely to live as long as someone who is already your age. No big deal.
The problem most people have is that they go in to their see their physician for their annual physical and the doctor says, “Bob everything looks good, blood work is normal, weight looks good…see you next year!”
In our minds, we think…”I'm healthy” and therefore when I apply for life insurance I should be assured a preferred rating. But that's not how it works.
You can be perfectly healthy as far as your doctor is concerned and still be issued a life insurance policy at standard rates.
When your doctor says that your healthy, he or she means that you are perfectly healthy for someone your age. The doctor believes that you have no acute problems that must be dealt with at the moment and thus…you are “healthy”.
Your mortality is viewed through a slightly more refined lens when it comes to life insurance underwriting.
A spade is not a spade
Another thing that we must point out is the lack of parity amongst underwriting classes from one life insurance company to another. Just because you are a preferred risk and company A doesn't mean that company B will also consider you to be a preferred risk.
No, in fact company B may issue a policy for you at a standard rate. Does that mean that company B somehow thinks you are unhealthy and company A is totally on your side?
Nope, not even close I'm afraid.
It just means that company B has a different weighting in their underwriting formula for certain things. They many not have given you as many credits or they may be more weight with some of their debits. Who knows and frankly who cares!
We have seen policies issued with a standard rating at company B outperform a policy issued preferred with company A in terms of the internal rate of return on cash value. And for most of our clients this of utmost importance.
Furthermore, just because you are issued a standard rate policy doesn't mean that something that WAS a good idea is now NOT a good idea. Even at standard rates, overfunded whole life insurance and indexed universal life insurance will work very well.
Why is that?
It's actually pretty simple–remember that to properly set up and fund a life insurance policy designed to maximize cash value performance we most often seek to minimize the death benefit of the policy. We want to get the death benefit to the lowest possible point where it can still be considered life insurance so that we can minimize the most expensive part of the policy–which is to insure the death benefit.
Since we are already setting up policies in this manner, going from preferred to standard makes a minimal difference in the overall performance of the cash value.
So don't worry if you're standard, it just means you're normal and that isn't so bad.
If you would like to have us help you design your policy and navigate the waters of life insurance underwriting, please contact us and we'll be in touch.
