Are you a discerning individual looking for a term life insurance policy? I don't mean large $1 million, I mean large at the very least $10 million and more. Think it's crazy? Remember life insurance companies will right 25-30 times earnings for people in their 20's and 30's so $400,000 in annual income gains admission to the club.
We're talking about you dear Wall St. hot shots.
We know that you're busy buying up cars, real estate, and wrist watches the size of dinner plates to show everyone else how much money you make, so life insurance on the cheap is typically you're approach, for now.
So, does buying buying life insurance and sorting through the term life insurance quoting game differ for you and your special income?
In a word…yes.
Some New Terminology for Large Term Life Insurance Policies
When a term case reaches into the tens of millions (sometimes even smaller amounts for some smaller insurance companies) there are a few new key terms that are important for an insurance agent to understand, and if the consumer comes in with this knowledge as well, all the better.
The terms are in no particular order:
Internal Retention Limit
The internal retention limit is the amount of risk (death benefit) the individual insurance company is willing to retain (issue by itself). This is the amount the insurance company will leave up to it's underwriting staff to review and approve (or decline) at whatever risk class they deem necessary. There are some benefits to falling within the company's internal retention limit, the major one is a speedier underwriting decision (if time is a factor, e.g. trying to get a policy issued before an age change).
Most agents run into reinsurance first through a substandard risk situation. When a proposed insured poses an especially higher health risk, insurance companies frequently enter the reinsurance market to move (at least some) of the risk off themselves.
Reinsurance is essentially the process of acquiring additional coverage (from another insurer) so if the loss is realized the original insurance company isn't the only company that takes the loss.
Reinsurance also comes into play when a case starts to become large. Once a policy goes beyond a company's internal retention, reinsurance becomes the next step to move some off the risk off the individual life insurance company.
Auto-binding authority is essentially a pre-established agreement (they're called treaties if you're really into details) with reinsurers that gives an individual life insurance company's underwriting department authority to “underwrite” on the behalf of the reinsurer.
In other words, the amount of coverage goes beyond the individual company's internal retention limit, but is within it's auto-binding limit so underwriting can more expeditiously choose which reinsurer will cover the additional risk based on underwriting treaties (guidelines it already knows it can use) to pick which reinsurer will cover the additional risk.
The Jumbo limit is the maximum amount of coverage an individual insurer will issue taking all other coverage into account (i.e. coverage at other insurance companies). Now, a stated Jumbo Limit is not necessarily the absolute final maximum an individual insurance company will except (most of the time it is, but exceptions can always be made).
Pay Attention to these Limits
While there are a lot of helpful “run your own term life insurance quote tools” spread throughout the internet, if you fall into the category of needing an extra-large policy, those search tools are going to be relatively limited in their ability to help.
Keep in mind, if your coverage amount goes beyond a company's internal retention, underwriting gets a little trickier. This is because the insurance company is going to allow the reinsurer's underwriting guidelines to trump their own.
An example is always helpful, so here's one:
Let's say you have borderline high blood pressure. You've met with an agent who understands your blood pressure numbers, but still decides to place your case with a company that he feels would issue your policy at preferred rates.
Only problem is you need $30 million in coverage and the company's internal retention is $20 million.
The good news: the company to whom you've submitted an application has an auto-binding authority of $35 million.
The bad news: the reinsurer takes your high blood pressure much more seriously, so instead of preferred, your offer from the company is at standard rates (significantly more expensive than preferred).
What's the best way to get around this?
It would be best if the insurance agent knew the internal retention rate to begin with, and then looked for another company (if it existed) to place the rest of the case with in order to keep all of the underwriting in house.
Now, the good news is there's a bit of a safety net involved…sort of.
Underwriting at the original company will warn the agent that the case is going to reinsurance, and this usually gives the agent an opportunity to approve this (in other words, underwriting is warning him or her that the case may come back less favorably than what the individual company would decide on it's own, and if it does, there will be no changing the decision after that).
This is why these cases often get split up and go to different companies.
Should I Always Split Up Cases for Term Life Insurance?
If your health stats fall comfortably within the underwriting guidelines for the risk class you and your agent are targeting, it's not nearly as important. It's a good idea to keep an eye on how the underwriting process goes (these cases will involve a lot of fact checking from the insurance company: medical exam, inspection report, Motor Vehicle Report, EKG, stress test, Attending Physician Statement, and possibly additional disclosures).
If the timeline to finalize your application isn't immediately pressing, and you can afford to wait for the additional time reinsurance takes (usually not that bad if it remains within auto-binding limits) then placing the entire case with one carrier isn't necessarily imprudent.
Large cases require a little more care and attention, and if you'd like more information pitfalls, you can certainly reach out to us. A little extra attention to detail, and your term life insurance application can be placed at best risk class possible without much incident.