The days of one disability policy to serve the needs of all people have come to an end. We have entered the era of disability financial planning. This long-sought capability has become a reality because of new underwriting attitudes, new product designs and new, flexible and substantial issue amounts.
The neglect of the disability insurance needs of people has been due to the unrealistic and punitive underwriting attitudes of the disability insurers in the past. Product design passed from one generation to the next with the same tired prejudices and antiquated beliefs plaguing the industry. As a result, little modernization of products and practices has been brought forward to enable one to do an adequate and professional job of disability insurance planning—until now.
New Era Underwriting: Simple, Fast and Easy
Multi-life underwriting includes fast, simple and easy underwriting for those folks who are a part of a multi-life group. Features such as guaranteed issue or guaranteed to issue are now available. Members of a cluster of persons being insured simultaneously all benefit from “happy underwriting.” Numbers from five or more or a percentage of all the eligible employees in a group are insured with only a minimum of underwriting. Faster, easier, simpler without the concerns of rejection or modification—that’s the value of these new collective underwriting programs.
Discounted premiums add to the allure of the cases being applied for on a multi-life basis. These advantages leave only the risk of being underinsured or being engaged in what may be an unacceptable occupation to certain insurers. That problem is frequently handled by another insurer that offers a supplemental plan that is recognized as being acceptable to the insurers who offered the base amount of coverage. This supplementation enables high income earners to build a true disability financial plan covering up to 65 percent or more of a person’s earned income, whether it be from salary, commissions, bonuses or any combination of those sources of income. The Council for Disability Awareness (CDA) studies reveal that a person is only adequately insured if the total benefits of his/her plans amount to 65 percent of normal earned income cash flow.
High limit supplemental disability plans have been reservedly offered for more than 30 years. This means they are tested, they are sound, and they are accepted as a necessary adjunct to underwriters of many disability plans wherein that insurer’s issue limits are inadequate to fill the needs of the consumer. Such plans do not discourage other insurers, whether it be an individual or a group plan, because the supplement completes the 65 percent objective of providing an adequate income amount.
Questions of financial concern are viewed more favorably than in the past as underwriters have settled into the world of disability financial planning and recognize business use of disability insurance underwriting.
Recent cases totaling $100,000,000 on each involved insured for buy/sell funding have been placed. Such demands for great sums of benefit protection help purveyors realize the enormity of risk presented to the underwriters. It helps to understand that the underwriters shoulder great responsibility to the insurer to be careful and accurate as to justification of amounts applied for and the soundness of the physical condition of the applicants.
Understanding the size of the risks to be assumed helps with the patience factor, but companies have in general recognized delay is no longer an acceptable stance, and most companies are now practicing expedient decisions.
Without writing an encyclopedia on the 12,000 known diseases listed in the new Merck Manual, here are some guidelines to help bring about a quick and easy—and therefore profitable—end to each case a purveyor pursues.
First, purveyors are wise to write a supplemental letter to be submitted with the application to help the underwriter move quickly on his decision to accept, reject or offer modified coverage. Here are examples of what should be in the supplemental letter in order to get quick and usually favorable results.
The Art and Science of Disability Insurance Underwriting
Underwriting need not be a barrier to profitable DI sales. Underwriters still need to have a good feeling and a good description regarding the risk they are considering. A 40-year-old person becomes disabled to age 65. At the rate of $20,000 per month for 25 years, that means a potential risk of $6,000,000.
The underwriter must know the applicant’s occupation. The underwriter’s guides will place the applicant in a category. If he is a doctor, lawyer, tuna boat captain, executive, salesperson or veterinarian, he will be put into the category agreed to by the chief underwriter and the reinsurer. But there may be variations in each category.
If he is a veterinarian the underwriter must determine and classify him as to his practice: Is it small animals only or large and dangerous animals? If he captains a tuna boat, is he an owner of the boat or is he an employee of a firm which owns the boat? Tell the underwriters about the firm. Is this a seasoned firm or the new venture of a person who has heard that tuna fishing can be very profitable? These are examples of risks that may defy the simple categories for veterinarians or tuna boat captains. Find out, and send a supplemental information letter with the application. How much experience has this person had? Who was his former employer? Did the veterinarian’s elephant client become ill and die; did the boat captain’s previous boat sink unattended, or was it involved in a maritime accident?
Character of the applicant is very important in underwriting. Take the case of the doctor. Does he perform surgery? What kind? Has his license ever been suspended? Why?
These kinds of questions will evolve from the case. The producer is in a much stronger position in anticipating questions like these and putting the answers forward rather than waiting for the underwriter to dig them out.
So, too, come trailing questions on the applicant’s health history: duration of an illness or injury, age at onset, age at complete recovery, occurrence of any similar symptoms since the recovery. Other information requested may include doctors’ statements, health care facilities used, and dates.
Before fatigue and discouragement set in, think of this communication as if you are writing a letter to a friendly underwriter whose interest is in making this application into a good case. This is your team. Together you will complete this case and deliver a joyous product: an income and guaranteed cash flow should the client become disabled.
Financial underwriting is understandable. It may on occasion involve an accountant to put the matter into simple terms. This is particularly true of business cases, which can become complex as they involve law, co-mingling of passive and earned income, and legitimate deductions.
In the modern world of disability insurance we have to consider group and individual plans, employer contributions and disability financial planning.
In individual plans the underwriter will want to know what other forms of insurance are in force and what other passive income the applicant might have or is eligible for at some future date. Having this information, the underwriter can program around passive income such as military reserve pay and previously earned pensions. He can program around group insurance, whether 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.
We now enjoy many business coverages to augment personal needs, which can go as high as $500,000 per month, overhead expense for any number of owners in a firm up to $100,000 per month or more, buy/sell funding up to $100 million, high limit plans, venture capital indemnity, key person, and kidnap ransom coverages.
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.