I'm going to clue you in on this relatively new kink in the life insurance underwriting rope. Bear with me for a bit, I'll give you some background on a real life example.
Just recently, I had a new client I was working with that needed a permanent life insurance solution for reasons that are laid out in the proceeding paragraphs.
For sake of protecting the privacy of the innocent, let’s call him–Mr. Smith.
Mr. Smith is in his early 70's, 73 to be exact. He has a pension from working in a federal government position and had chosen (years before I ever met him) at his retirement to receive a “life only” pension payout.
Choosing the single-life option is very common among civil service employees, retired teachers and union employees to name a few.
Pretty simple actually.
Mr. Smith gets a bigger check every month for selecting the Single-Life or Life-Only option.
So, what's the problem you ask?
More money is better right?
Well, the problem is that when Mr. Smith dies, his wife, Mrs. Smith is left without his income.
The term “life-only” is clearly represented in that the annuity or in this case his government pension, will pay monthly for the remainder of his life only. Shocking I know, an insurance industry term that actually means what it says–as elusive as the Sasquatch to say the least.
But I digress.
Mrs. Smith's monthly income would decrease by more than seventy five percent when Mr. Smith passes away.
Without getting into too much detail regarding their plan…as that was not the thrust of this particular post, the solution they chose to pursue was to purchase a life insurance policy on the life of Mr. Smith and have Mrs. Smith serve as the beneficiary.
This way, when Mr. Smith dies and his retirement income stops, Mrs. Smith will have a lump sum from the life insurance death benefit that she can use to generate an income stream, payoff their mortgage, or whatever she wishes.
But the goal is to provide her with some security in the event the Mr. Smith dies before her and thus also does his very nice pension income.
Mr. Smith is in his early 70's and like many other Americans, his health is not perfect anymore. Not to say that his health is bad, just not perfect.
He takes a few prescriptions and has a few other issues that life insurance companies may not view as extremely high risk but they are conditions that knock off a few points during underwriting.
These are all things that seasoned life insurance agents like myself expect to face during underwriting.
But, to add a new wrinkle to the underwriting equation, many life insurance companies now require anyone who applies and is over the age of 70 to complete a cognitive impairment exam.
Which is just a fancy way of saying, they want to have you take a memory test.
Needless to say, life insurance companies have found some evidence that links dementia and Alzheimer’s with an increased risk of mortality.
Basically, since we all know that dementia and Alzheimer’s are degenerative diseases, life insurers are now requiring their older applicants (most are requiring for anyone over 70) to complete the cognitive impairment testing in addition to the typical medical history, blood and urine testing that's always been required.
I know that most of us, myself included, tend to believe that people diagnosed with dementia, live for a long time after their diagnosis.Interestingly enough, the research shows this is merely anecdotal evidence. Most likely because we all know of horror stories of those family or friends who are diagnosed with Alzheimer’s in their fifties and live well into their 70’s or 80’s.
However, life insurance companies insist that their data shows that this sort of thing is rare.
In fact, there was a study published back in 2008 by the British Medical Journal (BMJ) that proves people with dementia have a significantly shorter life expectancy.
So, what is cognitive impairment testing?
Unfortunately, the type of testing that insurance companies have adopted as the standard for checking off the “does this person have a cognitive impairment” box, leaves much to be desired.
In the case of Mr. Smith, the insurance company, has their own version of a cognitive impairment test.
What does the test look like you ask?
The paramedical examiner, in this case an R.N., who came to Mr. Smith’s home to meet with him, discuss his medical history, perform an EKG, collect fluids and all of the other normal things an insurance company would request for a person of 73, also performed a “memory test”.
The test consisted of her reading to him a series of 10 common nouns—chair, book, table, cow, penny, balloon, flower, picnic, kitten and bank.
The nurse said to him:
“This is a memory test. I am going to read out loud a list of words one at a time and ask you to say the word and then use the word in a sentence. When you have completed using the word in a sentence, I will ask you the next word, until the full list of words is finished. Later in our interview, I will be asking you to recall the words.”
She then continued with the exam, having him perform a walking test, asked him a few other questions and finally six minutes later she said:
“A few minutes ago I read you a list of words to use in sentences. Please tell me the words that you remember. Take as much time as you need to remember the words.”
I won’t bore you with all of the instructional notes in the side column of the form that the nurse had to use from the insurance company. But the directions are very clear that if at least five minutes has not passed since you performed the first part (list of words and sentences) then move on and come back to this.
Mr. Smith recalled four of the ten words.
This resulted in an automatic decline for Mr. Smith due to possible cognitive impairment. You have to get at least five to meet their minimum underwriting standard.
In this case, the life insurance company did not choose to look at his medical records, lab results or medical history at all. They simply chose to deny him coverage based on a cognitive impairment. With no option to reconsider.
Well, that's not entirely true. He could be reconsidered if he were to visit a physician and pay around $500 out of his own pocket to have a more complete cognitive exam performed.
As far as I know, their were no notes regarding such a problem in his doctor’s records, no other such issues ever had been observed by me either.
*Sidenote: I had met with Mr. and Mrs. Smith on multiple occasions as we discussed their options more than once while they were making a decision about which option to pursue. I also spoke with them over the phone a few times as well.
As a matter of fact, Mr. Smith regularly runs a portable saw mill in his backyard, restores antique automobiles and operates a backhoe for friends.
Does that sound like a man with a cognitive impairment?
Obviously, the life insurance industry has research on its side when it comes to the increased risk of a premature death due to dementia or Alzheimer’s.
However, I have two concerns with this cognitive impairment testing:
- What they are passing off as “legitimate testing” for a cognitive impairment.
- There is no accepted standard across the board.
This is essentially the wild-west of underwriting at the moment.
I’d be willing to bet that most of us would have a hard time scoring all that well on the memory test as they refer to it.
As a matter of fact, as a control I performed the test with my unsuspecting wife. She is a perfectly sane and sharp 32 year old woman who runs her own successful business, while running our household (five boys included) with the precision of a Swiss watch I might add.
She could recall only 6 out of the 10 words.
This would place her in at best a standard rate class for life insurance underwriting purposes. To give you some perspective, there are at least three rate classes better than a standard rate with most companies.
For example: Standard, Standard Plus, Preferred, and Preferred Plus being the best rate class.
Keep in mind, my test was by no means scientific. But my point is that neither is the test administered by the nurse examiner on behalf of the life insurance company.
Most certainly as it stands today, every company has a different cognitive impairment test. As a matter of fact, I’ve already seen three different ones from three different insurers in the past month of doing some light research.
I know that the life insurance companies must do what they can to underwrite every possible risk affecting the mortality of their applicants.
No one will fault them for doing that.
As I often tell my clients, “you want to own a policy with a company that is profitable…only companies that remain profitable will be around to pay the claim when you die”
All I’m suggesting is that the life insurance industry should use a more comprehensive means of measuring cognitive impairment and be consistent. Not some “off the shelf” memory test that resembles one of those gimmicky things you can find online for reading your palm or what type of personality you have.
And as ridiculous as the testing is in its current form, please keep in mind that it's out there.
So if you're nearing 70 and thinking about possible changes to coverage, it may be prudent to move now.
On the other hand, if you are 70, its best to spend some time with an agent who knows what companies have what for tests to ensure you get the best risk class possible. And if you're an agent about to meet with a 70+ year old client for life insurance, you'd better spend some time familiarizing yourself with the various tests being given.