Underwriting Life Insurance….What Every Trustee Should Know

Recently, the Guinness Book of World Records announced the purchase of the world’s most valuable life insurance policy, a $201 million dollar policy. The previous record according to Guinness (although I have heard tale of cases that surpass both of these) was a $100 million dollar policy on David Geffen, a  founder of DreamWorks Studios, who got his start working with up and coming California rock stars like Jackson Browne and the Eagles.

The “record setting” Insured in unknown, described in various reports as “a California technology billionaire”.  The policy was placed by SG LLC, a California firm run by Sergey Grishin, a Russia-born entrepreneur.  While the multimillion dollar commission is quite the payday for any writing agent, it clearly will not affect Mr. Grishin’s lifestyle as he is reportedly worth over a billion dollars.

The title, “world’s most valuable life insurance policy” is a misnomer. In fact, no single policy with one carrier would ever get close to this amount. The $201M coverage placed was reportedly underwritten among 19 carriers.

Underwriting life insurance, even “small” policies in the $1-20M range, is an unknown process for many Wealth Advisors and Trustees, which is unfortunate since underwriting can dramatically affect the pricing of a policy.

One thing that affects the underwriting process on larger cases is the capacity of the carrier.  Capacity, also known as retention, is the amount of coverage a carrier can retain on its books before involving a re-insurance carrier. Carrier capacity can be as little as $500,000 to as much as $20M.  No carrier wants to carry on its books a liability on a single person that can affect its short term financial situation.  A few years back a big name carrier had a quarterly loss driven almost exclusively by the death of one individual.

In order to alleviate this problem, carriers look to the re-insurance market, where carriers go to insure their insurance obligations.  They “cede” a percentage of the death benefit they issue to other firms, who are then responsible for the death benefit claims.  Some of this occurs through automatic reinsurance agreements between a carrier and a reinsurer which can allow the carrier to bind coverage with the reinsurer without sending the case to the reinsurer for review.  Facultative reinsurance refers to those situations where the reinsurer reviews the application and has the ability to decline or accept coverage.

There are a number of simple rules to follow when underwriting a client to ensure that the best pricing is obtained.  You may not be able to directly control the process, but if you are a Trustee or a Wealth Advisor working with an Agent, you need to be aware.

First of all make sure that the firm you are working with has an in-house Underwriter that can act as an advocate for your client.  Most life insurance is placed through an intermediary firm that works with a number of different carriers.  Having an Underwriter, especially one with a strong health background, will be a plus.

Focus on specific carriers, do not shotgun the effort.  It is better to work with an Underwriter who understands carrier strengths and weaknesses than to send the case to many carriers. Some carriers are better at underwriting specific ailments and your Underwriter should know that.

Make sure the underwriting package is complete, makes sense and comes with a cover letter explaining the reason and need for the coverage and any pertinent details.  Think about it….if you are reviewing cases at a carrier and you have two files on your desk, one that is complete and concise or one that is incomplete and incoherent, which one gets your positive attention?

Almost every underwriting process will include a medical exam, the paramed.  Scheduling the exam in the morning before the day gets too hectic, and fasting before the exam are two tips that will help the outcome of the exam.  Limiting coffee, alcohol and strenuous exercise leading up to the exam will also help.

While most Agents seem to focus on a “spreadsheet analysis” for carrier pricing, I have found that the underwriting process is the most important aspect of determining policy.

If you are a Wealth Advisor, CPA, Attorney or Trustee working with wealthy clients you should understand the basics of life insurance underwriting.  On April 29th I will be hosting a webinar entitled What Every TOLI Trustee Needs To Know About Life Insurance Underwriting.  The one hour webinar will expand on this Blog and provide you with a working background on the subject.  A Handbook will be provided for your future reference.  Please go to our web page at www.youritm.com to sign up.