Estate planning often dictates the sale of life insurance to cover the family’s anticipated estate taxes so the heirs can keep more money. But what do you do when that client with the impending estate tax problem is old, sick, and running out of insurable options? And how likely is the insurance company to refuse to issue life insurance at any price?
Bernard Landers’ wife, Cynthia, died in December 1998 of cancer at the age of 70. After being married 52 years, Bernard found himself alone. “The cancer ran its course,” he says resignedly. “It took her in about five months. That’s when I lost her.”
“When my mother died, it’s like he realized he wasn’t invincible,” says Robin Landers, Bernard’s daughter. “We didn’t expect it. We thought my mother was in much better health. By the time we even knew she had cancer, it had already spread to her breast, liver and kidneys. Dad was in a state of shock.”
Cynthia’s death set off an alarm in Bernard, who was then 71 years old. He had been retired for three years at that point and lived in West Kendall, Fla. He fully expected his wife to outlive him, partially because Bernard had been diagnosed with adult-onset diabetes nine years earlier. Surely, he thought, his seemingly healthy wife would survive him. In fact, Bernard’s financial plan hinged on the belief that Cynthia would survive him.
“This was a wake-up call for his finances,” Robin explains. In addition to being Bernard’s daughter, she is also his insurance broker, running an agency in nearby Coral Gables. The plan had been for Cynthia to buy the necessary insurance on her life to pay the estate taxes that would ultimately hit after she, the second spouse, died. Presumably, she could be insured at a much lower cost than Bernard. Unfortunately, not only did Cynthia die first, she died without life insurance.
Alone and also uninsured, Bernard turned to his daughter for help.
“He didn’t have to be in this situation,” she says with slight scorn. “I mean, he founded this agency. You’d think he would have been better prepared.” Bernard Landers had been a successful insurance broker for 49 years. But like the dentist whose teeth fall out, Bernard hadn’t adequately followed his own professional instincts. Without his wife’s insurability to fall back on, he needed life insurance, and quickly, before he got any older or his diabetes became worse.
Bernard won’t say how much of an estate he has, only that he wants most of it to go to his four grown children. “I want to minimize as much as possible the amount of my hard-earned money that has to be handed over to Uncle Sam,” he says grumpily. “Any amount of money he gets is too much money. Uncle Sam wants as much as he can get, and I don’t want to give it to him.”
Bernard and Robin decided he should buy a $1 million 10-year term policy. &quo;Uncle Sam will get something,“ Bernard says, &quo;I don’t know how much, but $1 million will go a long way toward paying it off.”
While Bernard had finally recognized his need for some life insurance, buying it was another matter. Because of age and diabetes, coverage was going to be expensive. He needed a carrier willing to underwrite an aging diabetic. “I realize I’m not out-of-the-box brand new,” he says. “There’s my age and my medical condition working against me.”
Luckily for Bernard, he had his daughter working for him. Robin Landers, CLU, joined her father in the brokerage business in 1974. About 20% of her business is placing substandard, or rated, business. She called a handful of carriers for informal quotes.
“I didn’t bother with submitting an app first,” she says. “I usually don’t when I suspect a client might be an underwriting problem. I just call them up and outline the client’s profile. That’s usually enough for them to give me an estimate.” In her father’s case, however, some companies wouldn’t even give her a quote. “He’s an impaired risk. Some companies won’t touch him.”
Robin found one company that would, Lincoln Benefit. It offered $1 million in 10-year term—for $34,000 a year. “Dad had sticker shock,” she says, “but he should have seen it coming. He’s high-risk. If he were in perfect health, the same coverage would cost him $12,000.”
The plan, Robin says, is to start with term because the premium is about half of what whole life would require. “After we get him used to paying the premium, then we’ll convert it to permanent coverage in a couple of years,” she explains. “We’re taking baby steps to achieve his goal.” Other steps include gifting assets to Bernard’s children and six grandchildren. In the end, Bernard decided to increase the face amount of the policy to $1.25 million, which will cost him $70,000 per year.
Because of poor health and age, “there are some clients who should be kissing the underwriter’s backside for even offering them any coverage,” Robin says. She gives as a recent example a customer who wanted $4 million of whole life. “The client had a doctor’s note on his app saying there was some indication of liver problems,” she recalls. “When the underwriter offered coverage that was a Table 4 rating, the man refused the policy, said it was too much money. [A policy rated Table 4 typically costs 75% more than standard issue.] The last I heard, he was still shopping around the coverage.”
For Robin, out-and-out declines are rare. There is almost always some carrier that will offer a contract no matter how bad a client’s health or how old he or she is. Part of this willingness has to do with competition among carriers—“If I don’t offer him coverage, he’ll just get it somewhere else”—but some of it has to do with the reputation Robin, and agents like her, have among home office underwriters.
“I have a good reputation with the underwriters I know I can call when I’m shopping coverage,” she says. “I’m usually on a first-name basis with them. They know I’ve given them healthy business in the past. Underwriting can be very subjective, and that’s why I can have a little influence where my clients are concerned.”
You Can Always Find Coverage
The ratio of life insurance declines has remained steady in recent years, averaging around 5%, says William Carroll, an actuary with the American Council of Life Insurers. “That doesn’t mean 5% of all people don’t get insurance,” he says. “Those people usually just go to another insurer for the coverage. If they want insurance and try more than one place, at the end of the day, they get their policy.”
Carroll says advances in medicine, job safety and public health have led to more liberal underwriting standards. People who might have been table rated can now buy at standard or preferred rates, and people who might have been rejected can now be insured if they accept higher premiums.
According to ACLI statistics, 4.5% of ordinary life policies issued in 1997 were issued at substandard rates. Also in 1997, the last year for which figures are available, 93% of those policies were rated for medical reasons, including weight gain.
“Companies are run by their underwriting manuals,” Carroll explains. “They assign weight to certain conditions, such as diabetes, cancer, blood pressure, cardiac history, and price their product accordingly. There’s nothing personal about it at all. It’s simple arithmetic, although there are always borderline cases.” It’s with those borderline cases that insurance advisors may wield influence during the underwriting process, Carroll says. An advisor’s reputation for honesty and “being straight” with an underwriter might make a rating decision go more favorably.
According to Carroll, underwriting has changed over the last 15 years as companies have become more competitive for business and as medical diagnosis becomes more sophisticated.
“Companies are more knowledgeable in underwriting now,” he says. “For example, AIDS forced insurers to require blood tests for larger amounts of coverage. Since they had that blood sample in hand, they could test it for other diseases. It’s developments like this that sharpen the carriers’ ability to underwrite. I think in the future you’ll find that blood tests will get less expensive and accuracy will improve. This in turn will result in more preferred classes of underwriting.”
The Cost of Insuring HIV
If underwriting is becoming at once more precise and more liberal, one carrier, Guarantee Trust, in Glenview, Ill., has taken that philosophy to the bank. Since 1997, Guarantee Trust has offered up to $250,000 in whole life to people tested HIV-positive. So far, it’s the only insurer offering to write people with the virus.
Guarantee Trust doesn’t insure every HIV-positive applicant, however, and has strict rules as to who qualifies. The coverage is limited to ages 21 to 49 and applicants must not have yet been diagnosed with AIDS. They must be employed or receiving disability benefits and demonstrate the ability to pay the premiums. They must also be following a prescribed regimen of medication.
“Not all people take their medication,” says Michael Honeysett, vice president, life insurance division, for Guarantee Trust. Although the carrier seems liberal just by its willingness to insure people with HIV, “we are looking for the cream of the crop,” he says. Although he could not say how many HIV apps the insurer has declined, he says it is a “fair amount.”
But if your client has HIV, he or she better be prepared to pay. Guarantee Trust specializes in the impaired risk market, Honeysett says, and prices it profitably. HIV coverage runs a flat $60 more per $1,000 of coverage in addition to the annual premium. So if someone with HIV applies for $100,000 face amount, there would be $6,000 up front, plus, say, $1,825 in yearly premium.
Competitive Underwriting—and Reinsuring
While Guarantee Trust has gone headlong into insuring substandard business, including people carrying a virus that causes a 100% terminal illness, others are loosening their criteria in a grab for more business. The substandard risk market, especially for customers over 50 years old, like Bernard Landers, is full of people who need life insurance to protect heirs from estate taxes that can take up to a 55% bite.
“When they’re over age 50, there’s usually an estate to protect,” says Chris Graham, chief underwriter for individual life at The Hartford in Minneapolis. “These are the larger cases—over $1 million. Unfortunately, at those ages, you start to see the incidence of impairment go up.”
Characterizing underwriting as “more of an art than a science,” Graham says The Hartford declines about 6.5% of the apps it receives from people over 50 and table rates about 13% of those it accepts, all because of health impairments common to older people.
“We look at blood pressure, we look at weight, cholesterol levels, family history,” he explains. “And some people are just too risky to insure.”
Among those conditions that often result in an automatic decline: breast cancer within two years, lung cancer within five years, prostate cancer within two years, brain aneurysm within six months, and congestive heart failure. Yet even these conditions don’t make an applicant forever uninsurable or even rated. “What you should notice is that after time, if their condition improves, these people can reapply and get the coverage,” Graham says.
“Because of the competition factor, we’re accepting more business now than we have in the past,” Graham says. “Some applications once routinely declined are now being accepted, sometimes even at standard rates.” He gives as an example an undiagnosed diabetic. At one time, that was an automatic decline. Now, if under a doctor’s care, a diabetic can get standard rates.
The Hartford also finds growth-seeking reinsurers are helping them accept more large impaired risk cases. “Reinsurers are more aggressive,” he says. “They can tolerate more risk than we can.” Negotiating with reinsurers, he says, often results in the impaired client getting a better deal. “Reinsurers bid for the business,” he says. “They see underwriting as an obstacle to putting more business on the books.”
Richard A. Boutilier, second vice president of life underwriting for John Hancock in Boston, agrees that the most profitable market for life insurance—estate protection—is Janus-faced.
“It’s not unusual to find a medical impairment in this group,” he says. “While 93% of the apps we receive are approved at standard rates, about 4% are rated and 3% are declined. It’s fortunate for these clients that more and more are qualifying for standard rates because of advances in medical treatment that have had a significant impact on longevity.”
Better medical treatment also translates into more affordable coverage. “Ten years ago, someone with diabetes would have been rated, now he’s squeezed into standard,” Boutilier says. “Conditions that we would have declined not too long ago, we now accept. It’s routine.”
It’s Boutilier’s contention, however, that insurance advisors don’t have any pull on underwriting decisions, at least not at John Hancock. “We give them the best offer right out of the box,” he says. “We’re very competitive in our underwriting. Sometimes a broker or a general agent can appeal a rating, but there’s really no bargaining.”
Boutilier says an advisor can request a reinsurer to make an offer if he feels Hancock’s is too expensive or restrictive, and Hancock will farm out the app to a number of reinsurers it deals with. “We make an offer for the business,” he says, “and they make counteroffers. We’re willing to make considerations for estate tax planning cases. We’ve become more aggressive in the last five years because of the upscale market we want to reach.”
But even as home office underwriters claim they hold the line on appeals and negotiations and do business the same way for all advisors, agents say they do wield influence over this process.
“Underwriters will listen to you if you have high integrity and a proven track record,” says Robert Lee Bateman, 41, of Lincoln National in Ogden, Utah. “You need years of experience getting to know the underwriters as well as you can before you can call them up and appeal to their judgment.” Bateman has that experience, having been a professional insurance advisor for nearly 20 years. He counts about one-fourth of his business as impaired risk.
“You have to be honest and forthright with underwriters,” he says. “They need to be comfortable with you.” That’s getting harder to achieve, Bateman says, as home office decision-makers have been distancing themselves from their field forces in recent years. “Getting access to underwriters is getting more difficult,” he says. “Companies are scaling back the number of underwriters they employ as they trim their operating expenses. Sometimes, all you can do is use e-mail and the fax. They’re getting harder to get to.”
The hardest part of working the high-risk market, he says, is explaining to a client why he’s being rated or turned down for coverage. “Even with the best of efforts, you have declines,” he says. “You have to remember you’re often dealing with someone who didn’t know he had diabetes or cancer or liver problems. Underwriting—a business procedure—discovers it. It’s a blow to the client, but I’ve seen cases where lives were saved because of the underwriting process.”
Breaking the news to rated or declined clients is tricky, Bateman says. Essentially, you’re calling someone into your office to say the insurance application has been rejected, or the premium will be twice or three times what a healthy person pays.
“Why, Bob?” they ask. Well, it’s not your place to say.
“Because of privacy concerns, the medical information travels from the underwriter to the applicant’s doctor,” Bateman explains. “The doctor breaks the news and handles the follow-up treatment. It’s up to you to be honest and diplomatic.” Bateman usually explains that underwriting of the application revealed a problem, so go see your physician. After seeing the doctor, the applicant meets with the agent about the rated or declined insurance.
More often than not, high-risk clients already know they’re high-risk. “Most times, you already know there are going to be difficulties,” says Hal King, CLU, 62, an associate with Luttner Financial Group, a general agency in Pittsburgh. “They know of their problems beforehand. I’ll try my primary company, Guardian Life, first. If their offer is not too favorable, then I’ll farm the business out. The key is getting your cards out on the table in the beginning.”
Although only about one-half of 1% of King’s clients are impaired, the 36-year agent has spent enough of that time talking to underwriters on behalf of his clients, trying to coax favorable ratings. &quo;Sometimes it works,&quo; he says. “It depends on the case. I recently had a case where a guy was applying for disability coverage. It just so happened he had visited a chiropractor, and underwriting found out about it. They said they were going to deny the app. I talked to the underwriter and persuaded him to issue the policy. Sometimes those little talks make a difference.”
The key to influencing an underwriter lies in making that underwriter’s job as easy as possible, King says. “You cooperate as much as you can,” he explains. “Make the apps you submit very complete. And work on the quality of the business you place.”
“If I know beforehand that a prospect is so high a risk as to make placing his coverage near impossible, I stay away from it,” he says. “There are too many people out there that I’ve got to reach. I might be able to reach three or four people spending the same amount of time trying to place one impaired risk case.”
“Like Being Hit With A Baseball Bat”
If some agents try to limit the impaired risk cases they handle, others, like Jay Wischkaemper, CLU, ChFC, 50, an agent with MassMutual in Lubbock, Texas, go out of their way to place coverage on anyone who comes to them and needs it.
One of his clients, Gayle Potter, 63, is a chemist and 40% owner of Cardinal Laboratories in Abilene, Texas and Hobbs, N.M. Potter says he woke up one morning in 1998 thinking “I just didn’t have enough life insurance. I had put off buying any for years and it finally dawned on me that I had to protect my wife and kids from any business debt from the lab that would come due when I died. Now, I plan to live to be 200, but you know how that is. I’ll probably work until I’m 80. I’d rather wear out than rust out, but I’d retire sooner if I could sell the business.”
Potter turned to Wischkaemper, his friend, for advice. &quo;Whenever Jay sees me, he always wants to sell me insurance,“ Potter laughs. &quo;We did a review of my personal and business finances and Jay suggested that insurance would be the way to go.”
Wischkaemper advised Potter to apply for $350,000 of whole life. MassMutual declined to issue that amount because Potter’s exam turned up an abnormal EKG. Potter had known about the abnormality for 20 years, but his doctor had said it was nothing to worry about, so Potter didn’t. At Wischkaemper’s urging, MassMutual agreed to issue $250,000 to Potter, but he received a Table B rating. Wischkaemper and Potter met to discuss the insurer’s decision.
“When I met Gayle in my office after I submitted his app, we both knew what we were there to talk about,” Wischkaemper recalls. “I told him the company was disturbed about his health, and frankly, so was I. I told him about their offer for a reduced amount of coverage at a cost that was going to be higher than we thought. Delivering him that news was like hitting him with a baseball bat.”
Wischkaemper urged Potter to accept the carrier’s offer immediately, even before seeing his doctor for a follow-up. “The thinking was that we should secure the insurance first before Gayle found out if anything else was wrong with him,” Wischkaemper says.
Two weeks after the policy was delivered, Potter had additional tests on his heart. Potter learned he had a condition called a Right Bundle Branch Block, or blockages that could likely cause heart failure. His body was not getting the amount of blood it needed and Potter had to have a quadruple bypass. Surgery was scheduled on Nov. 5, 1998.
“Lucky for me, I got the insurance before I knew I had to have the bypasses,” he says. “As far as the insurance company was concerned, I wasn’t any more a risk to them then when I first applied for the coverage.”
Surgery went well for Potter, who took three months off to recuperate. He’s back at work now, and although he takes several drugs to regulate his heart rhythm and to prevent blood clots, he’s able to divide his time between his two lab locations and keep up with his seven grandchildren.
In MassMutual’s eyes, Potter is uninsurable for the next five years, but that’s Okay with him because he says he doesn’t think he’ll apply for more coverage in the future. He believes it might be too expensive. “I’ve got all I think I need,” he says. “But then again, I thought my heart was just fine, and come to find out, it wasn’t. I’m still being checked on by doctors.” And he’s still being checked on by his friend and advisor, Jay Wischkaemper.