I admittedly chuckle a little bit every time we get this question. I do have to admit, however, that I've not spent an incredible amount of time highlighting this product. Perhaps it's because there's less to say–but then again, there are those who spend a lot of time on this topic. Or, maybe I just have to admit that I'm more fascinated by, and more interested in spending my time discussing the whole cash value life insurance as a low risk asset class thing, but I think I've also allowed myself to appear put off by term insurance by virtue of the lack of discussion.
Here's the deal, in the life insurance biz, there's a lot more money in the “indemnity” (read: death benefit) focuses cases than there is in the cash focused cases (and in the case of designing these policies properly, there's a lot less money in the cash focused business). And there's no such thing as a cash value focused term case.
Yeah it sounds a tad self-serving, but hey we're all utility maximizers according to prevailing economic theory. That doesn't mean I only do it for the money (just that I'm not hear broken when they find their way to my door step). I do truly believe in the spectacular things life insurance can do on the death benefit side.
There are those who have suggested that I'm in no short supply of self-confidence. My view on it is, say what you want I'm going to remain committed at being exceptionally awesome as what I do.
And just as I believe in designing cash value life insurance policies to maximize what these policies can deliver, I believe that term insurance can also be treated in a similar fashion.
So how does one deliver value on a product that is so heavily commoditized?
Some time ago I talked about the term life quoting game, and this is a reality of the term life market that goes mostly overlooked. There are two aspects to this:
The tangential benefits are things like accelerated benefits, convertibility, and rider availability. For example a lot of term products vary widely in terms of their accelerated death benefits, they also can vary a lot with respect to how their waiver of premium riders work (including price).
Underwriting is the bigger variable, and it's hard for people to conceptualize. Truth is, one of the ways in which carriers manage expenses is to stiffen their underwriting practices. There are some who are quite well known for consistently toping lists for cheap term rates, but when you stack them up against other carriers in terms of underwriting offers they tends not to remain as cheap. The reason for this is, many of them will reserve a preferred or preferred plus offer while their lesser ranking competition much more leniently makes preferred or better offers, which often tips the scale in their favor.
I want to be clear about this to ensure understanding, because I've learned this point is rather nuance, and not fully appreciated on first pass. An example will help drive the point.
Let's say we have to insurance companies. Company A tops the list of a term quote comparison and company B is just outside of the top 5. Our hypothetical insured is rather healthy–he's not being brought to the hospice or anything–but his health isn't superhuman either. His cholesterol is within agreeable ranges with medication and if he was being entirely honest with you, he could stand to lose 40 pounds.
Company A looks better with a quick quote on rates, they certainly boast a lower premium vs. company B when comparing both companies’ preferred plus rates. But company A rarely makes preferred plus offers and our insured is technically 5 pounds heavier than company A's build table says he can weigh for preferred (say nothing about preferred plus).
Company B makes a lot of preferred plus offers and their preferred plus rates are certainly better than company A's preferred rates. Further, a look at the underwriting guidelines at company B suggest everything is within preferred plus territory. The insured would be prudent to send an application to company B.
One of the most frustrating things about life underwriting is its apparent lack of consistency (I would argue lack of transitivity). What makes it worse is the fact that there is no universal standard for what a preferred plus person looks like. It could be an incredibly fit person who works out every day, maintains a healthy diet, and boasts from impressive biometrics. And at some companies, this is their vision of preferred plus.
But at others, a preferred plus issue could be a mildly over-weight individual with elevated blood pressure and cholesterol numbers. What gets more annoying is the way some carriers will maintain archaic practices when it comes to assessing risks. Cholesterol and blood pressure treatment being a great example.
A lot of carriers have decided that treatment for either cholesterol or blood pressure is not indicative of a shortened mortality—at least not in how long they want the insured to live to view underwriting the risk of their death as a good risk to shoulder. There are those in the healthy life style arena who may suggest otherwise, but on this one, medical innovation wins in most carriers’ eyes.
While this can certainly be annoying, it’s also completely navigable.
Allow me to become a tad self indulged for a moment and note that as an independent insurance agent/broker (some states regulate what word I can use there) I’ve abandoned the days of suggesting that underwriting is this noble mysterious process that we can’t really predict and must check with them to see what kind of offer they’d make. When you’re a career agent, you’re taught to live by this philosophy—it also acts as a convenient sales close known as the medical close.
But we noted before that I’m in no short supply of self-confidence—I’ve also picked up a lot of great knowledge when it comes to the medical field, knowledge all good agents should spend some time developing.
So when I read a company’s field underwriting guide and I’ve determined that someone fits under a certain risk category, I’m non-too-thrilled underwriting comes back with a less attractive decision unless there is some additional medical information of which I was unaware. We’ve actually developed a pretty complex matrix (it sounds way more complicated than it really is) of who has the best and worst underwriting practices given various potential “health risks.”
In other words, I’m an underwriter too—at least that’s what the industry has told me and others for decades—and I certainly feel obliged to hold Home Office underwriters as close to their stated guidelines as possible.
Term insurance is a commoditized product and perhaps to some degree cash value life insurance is as well—spread sheeting has a way of going to commoditization. The process of dropping term insurance in favor of a lesser priced product isn’t all that big of a deal, it’s still a slight process (underwriting in all). So why not get it right from the beginning?
To those who have asked me if I’ll write term insurance, the answer is absolutely. And not only will I do it, I’ll expend a few more resources than most to ensure that I’m convinced I’ve found you the best deal—something that can require a little more effort than a lot of agents are willing to put forth.
We’re experts in the insurance, and we feel as though you should approach all of these things with a dedication to maximizing value to the client in the greatest degree possible. It’s not just term insurance, it’s a financial decision that you should make intelligently and ensure you get the best deal possible.
If you’d like more information, or simply want to compare notes we’d be happy to help you out. And if you’re an agent looking to know if you’ve been steered correctly by your General Agent/Marketing Organization/etc. feel free to reach out to us also about term life insurance.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.
Should You Intentionally UNDERfund Whole Life Insurance?
2015 Operational Cash Flow Growth for Whole Life Focused Life Insurers
Life Insurance as an Income Producing Asset with the Power of Leverage
An Indexed Universal Life Insurance Success Story