Whats involved in underwriting a life insurance

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             I’m
        Uninsurable?
 What Does That Mean?
                       By Richard Aubrey




W
           hat’s involved in underwriting a life insurance                  Secondly, there is the matter of physical labor. Repetitive
           application and what could be an obstacle to getting        motion injury becomes more of an issue as the masses increase
           a policy issued? In the water conditioning and              and the convenient and ergonomically sound ways of shifting
purification industry, there are two possible sources of insurability   them become inconvenient. I had a client who’d ruined his back
issues.                                                                by the age of 28 due to delivering potato chips, which don’t run
     The first is chemicals. Those involved in the water               very heavy to the barrel.
conditioning and purification industry are not dangerous unless              So it can happen to folks in the water business. I recall in
you drop a drum of one of them on your foot or drink a couple of       the Boy Scouts getting a Tenderfoot to fetch, “Oh, five gallons
gallons of one of the smellier ones uncut. Chemicals do, however,      or so,” of water. “Sure,” the kid would say, “no problem.” They
present a possible insurability risk.                                  have to learn some way.
     I have a client on total disability due to exposure to a
chemical in a lumberyard. He is permanently out of work with           First steps
neurological issues, so ceasing exposure isn’t going to help.                Let’s presume for the moment that you have been overtaken
Nobody else in the lumberyard is ill and it’s not a substance          by insurability issues in your business. What’s next? What does
generally considered alarming. But, once in a great while, we          this all mean within your industry?
have the situation of a severe individual reaction to a substance            One is to get insurance early before bad luck catches up. Some
not otherwise dangerous.                                               of it might be the ordinary bad luck and some of it might be the
                                                                                                kind associated with the business.
                                                                                                      You can also use the business structure
                                                                                                to get group insurance. Group term life
                                                                                                insurance is, as you know, deductible as a
                                                                                                business expense under Section 79 of the
                                                                                                IRC. The insured employee does not have
                                                                                                to report income if the benefit is $50,000
                                                                                                or less.
                                                                                                      Group term life insurance is guaranteed
                                                                                                issue. Companies will issue various
                                                                                                amounts of life insurance and disability
                                                                                                income insurance (which is also deductible)
                                                                                                without reference to insurability. They
                                                                                                simply do not ask questions.
                                                                                                      The amount available varies from
                                                                                                one company to the next, but is usually
                                                                                                dependent on how many employees you
                                                                                                have. We have companies that will do
                                                                                                a good job for firms with as few as five
                                                                                                employees.
                                                                                                      Unfortunately, you may not use group
                                                                                                term life to fund buy-outs or as key man
                                                                                                insurance. It may only be used as a personal
                                                                                                benefit, which means, generally, your
                                                                                                family will be the beneficiary.
                                                                                                      Still, this isn’t all bad. Having your
                                                                                                family get money directly will certainly
                                                                                                ease the difficulties involved in either
                                                                                                winding up the business or rearranging
                                                                                                it with the surviving partners even if the
                                                                                                latter isn’t funded as neatly and efficiently
                                                                                                as it might be if you were insurable. Your


Water Conditioning & Purification                                                                                              MARCH 2009
agent will be able to find some companies with liberal guaranteed         Choices
issue limits for both life and disability income insurance.                   So an applicant whose underwriting information falls within
                                                                         the numbers for a standard rate gets the standard rate. If there is
Underwriting insurability                                                something going on which increases the risk, the company has
     Underwriting refers to the company’s evaluation of                  several choices. The most severe is to decline. They will issue
information regarding your insurability. They will want to know          nothing. They can postpone the application, saying they’d like
about you, primarily about your health, but the applications also        to look at it after some time has passed, to let new issues that
ask questions about your job and your wild hobbies, if any. They         haven’t yet shown a trend sort themselves out. That way, they’ll
will write to your doctors and ask you to take an exam.                  know what they’re facing.
     Underwriting varies according to which kind of policy you                The company can rate you. That is, they can raise the rate.
want. A life insurance underwriter, for example, isn’t going to pay      Since many companies have up to six or even seven rate classes,
much attention to your having a bum knee. A disability income            you might not get that super-duper rate like the one they advertise
underwriter will be concerned about the knee.                            on television because almost nobody gets it. You have to be a
     But the disability income underwriter will give it more or          laid-back marathon runner whose great-grandparents lived way
less weight depending on what kind of impact a bad knee going            past any reasonable age. I exaggerate, but not much.
sour could have on your job. In other words, how dependent on                 So if you don’t quite make the height/weight ratio for the
your knee is your occupation? High steel work? That’s important.         best rate, or the blood pressure table, or if you’ve been outside
Accountant, not so much. Disability income underwriters are a lot        the country to what is sometimes called the developing world, or
fussier than their life insurance counterparts. You’re a lot closer to   you have risky hobbies, they may simply rate you up one or two
being disabled than you are to being dead.                               rate classes. This could be as much as fifty percent or more.
     A life insurance underwriter won’t worry much about joint                They can add what is known as a flat extra. This is usually
problems, with a couple of exceptions. One is if surgery is a            done for applicants who have risky hobbies such as flying or skin
prospect. They’d prefer to wait until you get safely away from the       diving. A flat extra for a student pilot, for example, could be $3.50
hospital. The other is that some of the more serious joint problems      per year, per thousand dollars of insurance.
require serious medications whose side effects could, at least for            Since, for young folks in good health, the base rate for ten-
some people, be dangerous.                                               year term could be sixty cents per year per thousand, the flat extra
     So what is ‘dangerous’? Companies calculate their rates             can be a hefty price to pay for your fun. But, once you achieve
based on mortality tables, which take into account all people in         some certification, such as visual flight rules or instrument flight
the country. Then, with other tables, they calculate what it would       rules, you can get the rating removed.
look like if they kept out people with terrible weight problems,
histories of cancer or heart disease and so forth. They quantify         Risky hobbies
their underwriting standards.                                                As a general rule, extra insurance premiums to cover for




MARCH 2009                                                                                                 Water Conditioning & Purification
risky hobbies is a modest part of the cost of doing whatever it is   these are different. Say, for example, you have a history of back
that you’re doing. When you have risky hobbies, the company          problems. It is difficult, if not impossible, for the company to
will usually offer you a choice.                                     quantify the extra risk. So they will offer the exclusion.
     That is, pay the extra, whatever it is, or take an exclusion.        If your back issues contribute to your disability, you are not
An exclusion for a flyer means that if he piles in while flying, the   covered. Take it or leave it. They may exclude from the exclusion
policy will not pay.                                                 the possibility of injury to the back after the policy is in force. So if
     Other circumstances are covered as usual. No additional         your back just gradually goes out on you, you’re not covered.
risk to the company—flight mischances being excluded—means                  But if you fall off your ladder cleaning the eaves, you are
no additional premium. It matters not how many exclusions,           covered. Some companies take the position that a back which
acknowledgments and amendments Joe Aviator signed. If he             starts out being questionable is more likely to go all the way
piles in, all the aviation community knows is that Aubrey isn’t      when injured than is a healthy back. And their exclusion will
paying Mrs. Aviator and all the little Aviators, who are currently   also exclude future injury.
starving. So if Joe Aviator insists on an exclusion, we will send         Disability income applications come back with some sort
him elsewhere.                                                       of underwriting action on them about four times as often as life
     Sometimes after a certain amount of discussion, Mr. Aviator     apps. That’s why I advocate that the time to get disability income
will agree. It’s pretty simple. When you need life insurance if      was yesterday. The things that can sneak up on you or smack you
you die of pneumonia, you need life insurance if you fly into         in the head with a wet sandbag and disqualify you for disability
a mountain. If you don’t need life insurance if you fly into a        income are unfortunately quite common.
mountain, you don’t need life insurance.                                  If you have a health issue which can’t be isolated, such as
     One extremely important rule about underwriting is that         hypertension, the disability carrier will rate the policy, which is
you are not an underwriter. Don’t take yourself out of the game      to say, increase the premium, if he does not decline it or offer
because you add up what ails you and decide all on your own          reduced benefits.
that you’re uninsurable.
     You might be right. But a good life insurance agent knows       Long-term insurance
of companies that specialize in what are known as special                 Long-term care insurance is underwritten differently than
risks or substandard risks. The latter has become less common        either life insurance or disability income insurance. The key is
in our vocabulary. Hardly anybody wants to be known as               what the policy covers, what it will pay for. If you have some
‘substandard.’                                                       kind of heart issue, such as congestive heart failure, that will
                                                                     gradually reduce your ability to live independently, the long-term
Disability insurance                                                 care underwriter will be extremely concerned.
    Disability income insurance also will offer exclusions, but           To make a hypothetical example, if you have a heart
                                                                                           problem of some unknown type in which
                                                                                           the heart will work just fine until, at some
                                                                                           unpredictable moment it will just plain stop,
                                                                                           that wouldn’t be a long-term care issue.
                                                                                           You wouldn’t be making any claims on the
                                                                                           policy. I had an applicant tell me he had a
                                                                                           heart catheterization scheduled shortly.
                                                                                                I called the company who told me that
                                                                                           they’d look at him after the operation—they
                                                                                           did and they took him at standard rates.
                                                                                           Either his heart was in great shape or it
                                                                                           was going to stop on a dime. It was not
                                                                                           going to run downhill and put him in a
                                                                                           nursing home. I know, this sounds kind of
                                                                                           cold-blooded.
                                                                                                The best solution of all remains
                                                                                           to get your insurance before you have
                                                                                           insurability issues; don’t put it off. You’re
                                                                                           not an underwriter; don’t decide you’re
                                                                                           uninsurable.
                                                                                                Let the professionals do that. If you are
                                                                                           uninsurable, get guaranteed issue group life
                                                                                           insurance.

                                                                                            About the author
                                                                                              A graduate of Michigan
                                                                                            State University with a
                                                                                            BA in psychology, Richard
                                                                                            Aubrey has been in the
                                                                                            insurance industry for over
                                                                                            30 years. He has extensive
                                                                                            experience in business
                                                                                            insurance issues and insurability issues.


Water Conditioning & Purification                                                                                              MARCH 2009

				
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