Did you know that if you are over 70, and need life insurance, you may be asked to perform a memory test? Or if you prefer to use fancy life insurance company wording, a cognitive impairment test.
This sort of testing has not been around that long, in fact, it's a relatively new kink in the life insurance underwriting rope. Keep reading and we're going to share a real-life example with you that will elicit a raised eyebrow at the very least.
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 settlement option.
Choosing the single-life option is very common among civil service employees, retired teachers, and union employees to name a few.
Pretty simple actually.
Why Choose the Life Only Settlement Option?
Mr. Smith gets a bigger check every month for selecting the Single-Life or Life-Only settlement option.
More money is better right? Very true, when you are retired, more money flowing in every month is generally a better option.
But it does create a bit of a problem for Mr. Smith or more accurately, it creates a problem for Mrs. Smith because now when Mr. Smith passes away, she is left without the income from his government pension.
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 75% when Mr. Smith passes away.
How Pension Maximization Solves the Problem
Without getting into too much detail regarding their plan…as that is not our focus here, 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, pay off their mortgage, or whatever she wishes.
But the goal is to provide her with some security in the event Mr. Smith dies before Mrs. Smith and thus also does his very nice pension income.
Life Insurance Company Demands a Memory Test
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 certainly prevent him from received a preferred plus (best) health rating.
These are all things that veteran life insurance agents 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 dying prior to your life expectancy.
Basically, since we all know that dementia and Alzheimer’s are degenerative diseases, life insurers are now requiring their older applicants (most require for those over 70) to complete the memory test for insurance. And of course, this is 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.
What is a Memory Test for Insurance?
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 its own version of a memory 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 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 have 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 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, there 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 sawmill in his backyard, restores antique automobiles, and operates a backhoe for friends.
Does it Seem Like He Has a Memory Problem?
Obviously, the life insurance industry has research on its side when it comes to the increased risk of 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 cognitive impairment.
- There is no accepted standard across the board to test insurance for memory.
And furthermore, 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 41-year-old woman who runs her own successful business while running our household 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 a standard rate class at best 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 neither is the test administered by the nurse examiner on behalf of the life insurance company.
As it stands today, every company has a different sort of memory test. Matter of fact, I’ve already seen three different ones from three different insurers in the past month of doing a few quick searches on Google.
I know that 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”
But perhaps 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.
So if you're nearing 70 and thinking about possible changes to coverage, it may be prudent to do it well in advance of getting there.
On the other hand, if you are 70, it's best to spend some time with an agent who knows what companies have 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.