In his book, Life Insurance, Solomon Huebner, founder of The American College, shattered the myth that disability insurance was a casualty insurance coverage by stating: “Disability insurance clearly falls in the life group of coverage and is just as urgent as life insurance in its ordinarily used forms.”
However, the art and science of underwriting disability insurance differs from life insurance, and these differences account for much of the disdain some have for disability insurance. On one hand, purveyors have difficulty ignoring the disability needs of their prospects and clients; yet, on the other hand, the negative experiences they have encountered with prior submissions make them often choose not to market DI.
Underwriting does not have to be a barrier to profitable DI sales. You might say underwriting DI is more akin to applying for a bank loan because underwriters need to have a good feeling and a detailed description of the risks they are considering. An underwriter of DI views a 40-year-old executive with a monthly income of $30,000 as a potential $6 million liability. This would be the amount of benefit this executive would stand to collect if 66 percent of his income needed to be replaced until age 65.
Therefore, in order to simplify the task for an underwriter and to build his confidence in the applicant, descriptive word pictures will play a crucial role. Salespeople by nature are storytellers. Thus, if an agent takes the time to tell the client’s story (as opposed to allowing a dry and factual application to tell the story), the success rate for approval increases (which, of course, increases the producer’s placement ratios). Unfortunately, well-constructed cover letters have become a bit of a lost art.
An underwriter must understand an applicant’s occupation. The underwriter’s guides will place the applicant in a category agreed to by the chief underwriter and the reinsurer, but there may be variations in each category.
For instance, if an applicant is a veterinarian, the underwriter must classify the person with regard to his practice: Does the proposed insured’s practice include large and dangerous animals? If the applicant captains a tuna boat, the underwriter must know if the proposed insured is owner of the boat or an employee of a firm that owns the boat. Further, the underwriter must determine if this is a seasoned firm or a new venture by a person who has heard that tuna fishing can be very profitable. These are just a few examples of risks that may defy the simple categories for veterinarians or tuna boat captains.
Character of an applicant is also very important to an underwriter. Let’s examine a case in which the applicant is a surgeon. Besides knowing what kind of surgery is practiced, other pertinent information may prove helpful to establishing good character. Has the doctor ever had his license suspended? If so, why? Has he ever been involved in a drug or alcohol rehab program? If so, how long ago, and what were the results since then?
A producer will be in a much stronger position by anticipating questions such as these and putting the answers in a cover letter rather than waiting for the underwriter to request more information.
Health history questions are also a consideration in the underwriting process: duration of an illness or injury, age at onset, age at complete recovery, and occurrence of any similar symptoms since the recovery. Other information requested may include doctors’ statements, health care facilities used and dates. The more thorough a producer is at documenting this type of information, the more likely fast and efficient turnaround in underwriting can be expected.
Troublesome pre-existing illnesses such as cancer, heart trouble and nervous conditions are easily taken in stride. Cancer is excluded for only the first five years following recovery. Heart disease may take a rating instead of an elimination waiver. Mental or nervous conditions and drug or alcohol history can often be handled by rating or coverage modification. Such conditions were previously excluded; however, today pre-existing conditions are often considered for issue.
Financial underwriting is also understandably important in underwriting DI. Like placing money in a wall safe for the insured to use if they become injured or ill, justification for the amount of money to be reserved is prudent and should be understood by any professional insurance agent.
Often the attitude of a proposed insured discourages a producer from properly collecting the information needed to justify the needed insurance. People are accustomed to calling their auto insurance agent and binding coverage over the phone, yet when they go to the bank for a home mortgage, they have no problem providing financial information that is being asked of them.
Financial justification may on occasion require an accountant to put the matter into simple terms. This is particularly true of business cases that can become complex, involving tax laws and co-mingling of passive and earned income and legitimate deductions.
A component of the financial underwriting also involves knowledge of other forms of disability benefits available to the proposed insured. The applicant may have passive income or may be eligible for some at a future date. Having this information allows an underwriter to program around income from military reserve pay, previously earned pensions or group insurance (paid for by the employer or not) and give credit to the coverage, subject to taxes. The goal is to deliver at least 65 percent of normal income cash flow.
Producers must think of the underwriting process as one of professional communication. In preparing a cover letter, a tone of friendliness and cooperation should be used. All underwriters are in the business of selling insurance and are aligned with producers’ interests—on the same team. Together a producer and an underwriter can complete a case and deliver an incredible product—guaranteed cash flow, should the client become disabled.
Underwriting complex cases is not mysterious, should not be difficult and can even be fun. Today companies are cooperating profitably and brokers need no longer shun writing this urgent coverage. Dr. Huebner’s observations of nearly a century ago are still viable: Living death and dead death insurance belong in the same stable and should be promoted with equal enthusiasm, which is indeed possible.
W. Harold Petersen, RHU, DFP
RHU, DFP, is founder and chairperson of Petersen International Underwriters. He is recognized as an expert in underwriting development and policy innovation for such products as high-limit disability insurance, residual disability benefits, cash-value DI, and the expanding field of disability financial planning. The life/disability industry has acknowledged his leadership as an author, educator, motivator and leader, and has bestowed upon him the Harold R. Gordon Memorial Award (NAHU), the Will G. Farrell Award (NAIFA Los Angeles), the Lifetime Achievement Award (IDIS) and the Distinguished Service Award (NAIFA CA). His extensive industry involvement includes NAIFA, LIMRA, NAHU and The American College, all on local, state and national levels as well as IDIS. Petersen can be reached at Petersen International Underwriters, 23929 Valencia Boulevard, Valencia, CA 91355. Telephone: 800-345-8816. Email: firstname.lastname@example.org.