Underwriting - The Truth, The Lies and The Stuff Between

"One of our partners had cancer a few years ago, can they get insurance?" 

You can substitute "cancer" with heart attack, high blood pressure, diabetes and an assortment of other conditions. I get this question often from business owners or their team when we are underwriting the Life Insurance for their Buy/Sell Agreement. My only answer is, "I don't know, but we better find out before we do anything else, and how much it will cost."

Often an ownership group will willfully neglect their need to address the transition of their business because of a question of health or underwriting. There are sometimes things that some business people don't want their partners knowing about their life, or they've been told once by somebody with a passing knowledge of their situation that they were uninsurable.

Below is a quick Case Study (names changed to protect the innocent)  that lays out one such situation that I was recently involved in:

BASIC FACTS OF THE CASE: LM&OP Engineering, LLC is setting up new corporate documents to incorporate O and P as partners an L and M who own 80% of the organization are retiring in the next 10 years.

THE PROBLEM: L and M are in their middle 50s and plan to work well into their 60s. O and P are on the hook in their agreement to pay out L and M for a period of 10 years the value of their shares when they retire; however, in the event of death the value is due within 1 year. To meet the terms of the agreement of course all parties must get life insurance policies, for L and M the plan is to replace two expiring term policies with premiums that will be climbing up to $15K and increasing annually each for $1.5M of coverage with new 20 year term policies in order to protect O and P past L and M's retirement. It is known among LM&OP that L has had a litany of health issues over the last 5 years, L has sought holistic medicine and become vegan at the advice of his daughter and lost 15lbs over the course of the last year, but his medical record will still show tests or treatments for possibly fatal conditions.

A SOLUTION: L does not have accept the first quote that is given to him, and he should not. L can have his medical records reviewed and answer some questions about his health history prior to ever submitting an application for coverage. These records are then in turn submitted to carriers to give best tentative offers awaiting an application and full underwriting. This process assures prior to any application that the insured and the carrier are a match and that the best premium is being offered.

HOW IT WORKED IN PRACTICE: 

·        Prior to the actual application with the carrier L, M, O & P each filled out a pre-underwriting questionnaire and signed a medical release for their records to be reviewed. 

·        The pre-underwriting revealed that each owner had some prescriptions and conditions which depending on the carrier may have gotten them into a sub-standard rating there by costing each of the partners more money to cover the higher premium amount for a sub-standard premium.

·        Each owner was presented a tentative offer for the carrier best suited to them

o  In every case the carrier best suited for them that would offer the best premium based on their health was not the carrier that would have been the top carrier if age, gender and death benefit were used like a typical general quoting system

o  The carriers from the general quoting system in every case would not have offered a "preferred" rating and in some cases would offered sub-standard rates

o  By pre-underwriting rather than choosing the cheapest carrier out of the general quoting system LM&OP saved $17,500 annually