Once a life insurance company receives your application for life insurance, its underwriting department will begin the evaluation process to determine whether or not you qualify for the insurance and, if so, what is the appropriate rate classification. The company may determine that insurance coverage cannot be issued as applied for. In that case, the company is likely to offer you insurance on a modified (or “rated”) basis.
Life insurance companies employ a medical director, who advises the underwriting department on difficult or borderline applications. The medical director will be an M.D., and may be a full-time employee or a part-time consultant.
If your application is a borderline case, chances are the medical director will have been consulted. In many cases you can negotiate with the company. This may call for furnishing additional detailed information about the condition or conditions that concern the underwriter. That is why it is important to find out the exact reason why your application was declined or rated. With that information in hand, you should then consult your personal physician. Always bear in mind that the insurance company is taking on a risk by offering you insurance, so that their view of your medical situation will necessarily be more conservative than your doctor’s opinion. If your physician does not agree with the insurance carrier’s decision, one of two things may be occurring.
First, your physician may not have been fully forthcoming with you regarding a health condition or you may have a new condition. Second is that the insurance carrier does not know the full details. This may be due to incomplete medical records or some other reason. This is where your choice of advisor can play a major role. Your advisor should act as your advocate in case your application is declined or modified, to see if furnishing additional information will allow the company to make a more favorable offer.
I have found that in about 50% of the cases where the initial offer is not favorable, this is due to poor communication. Your advisor will find out as much as possible about the company’s reasoning for the declination or modified offer. Then you can discuss the situation with your own doctor. After assessing the situation in this way, your advisor may suggest further negotiations with the insurance company in an attempt to get a better offer. Alternatively, your advisor may suggest shopping around for a life insurance company with more experience in underwriting and issuing policies for cases similar to yours.
What is a rated policy?
After many years of working with many different types of medical conditions, life insurance companies have compiled reliable statistics that may allow them to make a more favorable offer. Two very important underwriting variables are the company’s risk tolerance for a given medical condition, and how it sets an appropriate rating and premium for that condition. These factors vary from company to company. Again, underwriting is more art than science, and different life insurance companies may view a given medical condition or lifestyle consideration differently.
Occasionally—perhaps 10% to 15% of the time—the applicant will be offered a rated policy. This means that the applicant does not meet the company’s standard rating criteria and the company must therefore charge a higher premium to cover the increased risk. Ratings are assigned based on health history and lifestyle considerations.
Here are some examples of situations that may result in a rated policy:
- family history of cancer or heart disease;
- multiple moving traffic violations within a certain period of time;
- hazardous or risky avocations (e.g., deep scuba diving, parachute jumping, mountain climbing);
- height and weight outside the company’s standard criteria;
- tobacco usage or any health issue that is not under control or otherwise being dealt with;
- history of certain conditions, such as cancer or heart disease; and many other conditions (i.e. anything that might affect mortality).
Some companies offer an impaired risk program. These are designed to provide insurance to those who have health issues that caused them to be declined coverage elsewhere. There is a considerable number of such companies, and typically, it will be a large, respected company offering a full range of life insurance products. A few companies offer guaranteed issue or simplified underwriting programs. There are even some “impaired risk” products (i.e., for those with significant medical conditions) available with no extra premium over the company’s standard rate. All rated and declined applications should at least be considered for impaired risk underwriting. It’s worth a try in most cases.
Don’t give up hope—there may be life insurance available to you at an affordable cost. The best way to find out is to check around. Your advisor can help you to do this.
Even with a rated premium, the applicant may have a life expectancy well into the 70s or 80s. Only about 5% to 6% of the time will the application be declined. Declined applications are comparatively rare and are reserved for the most serious medical conditions, such as cancer (currently under treatment) or advanced heart conditions.
Since each applicant’s circumstances are unique, the risk-assessment process must be tailored to each applicant’s situation. Underwriting requires good judgment, for there is no one magical solution to every underwriting problem. Here is where an independent life insurance advisor can pay off for you. Your advisor works with several different life insurance companies on a regular basis, and is therefore in a position to choose the company most likely to issue the sought-after policy on the most favorable terms.
A life insurance policy is a financial asset, just like stocks and bonds. The key to successfully getting through the underwriting process is finding a company that will invest in your life. The company wants you to live long and prosper.