What every advisor must know about underwriting

Although most advisors are familiar with life insurance’s financial protection and planning benefits, they can be surprised by the complexity of the medical underwriting process and the frictions of obtaining affordable and appropriate coverage. 

For clients who have higher-risk health or lifestyle factors, the underwriting process can be particularly intimidating and challenging to navigate. All too often, medical impairments may surface late in the process of obtaining insurance coverage, and this can derail a client’s carefully designed financial security plan.

Advisors can take a number of steps to minimize the impact caused by underwriting detours and ensure that they get their clients the coverage they need at the most competitive terms they can. These steps include:

» Asking detailed questions upfront to better understand client insurability.

» Getting clients to disclose their medical history. This reduces underwriting surprises by improving data quality.

» Requesting informal offers from carriers to ensure that clients spend their time applying for the right policy.

» Working with a brokerage partner who has experience crafting underwriting narratives and negotiating with carriers to get the best coverage possible. 

A closer look at life insurance underwriting reveals opportunities for advisors to provide exceptional guidance and thoughtful assistance to their clients.

Uninsurable? Not so fast

Although some medical conditions may prevent clients from securing coverage, many chronic ailments — including diabetes, heart disease, some forms of cancer and even HIV — do not. Over the past decades, as medical diagnoses, health care and pharmaceuticals have made major strides, so has the ability of clients with certain chronic conditions to obtain competitive life insurance offers. 

Because preexisting medical conditions can significantly impact both the cost of coverage and carrier approvals, it’s important for advisors to collect detailed medical information upfront. In doing so, advisors can better assess their clients’ insurability and identify potential underwriting challenges. 

This proactive approach allows advisors to guide clients toward the most suitable coverage options, minimizing the likelihood of surprises or delays later in the process.

Asking detailed questions is commonly known as field underwriting, and the goal is to learn enough about a client’s health history to compile the most complete file possible, including context about how well a client’s medical conditions are managed. 

Although advisors should always ask general medical questions, many of the important details can be gleaned from targeted follow-ups. For example, if a client has diabetes, much of the underwriting decision will be based on how well managed the disease is. 

If an advisor learns that their client’s A1C blood sugar levels are below 7.0, it’s more likely that the client will be eligible for a standard rate class (although some select carriers may offer preferred). Similarly, if a client has a history of cardiovascular disease, advisors should get a sense of the disease’s severity, such as whether the client has had cardiac episodes, including stenting, heart bypass surgery or atrial fibrillation. 

Technology has made the field underwriting process easier. Digital forms can now be sent to a client, allowing them to input their personal, health and lifestyle information directly. This reduces the chance of errors and miscommunication.

Finally, once medical information is collected, underwriters or brokerage partners with a deep understanding of the underwriting process can help navigate complex cases. These experts can locate carriers most likely to provide a favorable offer, craft a narrative that outlines why a client’s medical condition is well controlled and, in some circumstances, negotiate with carriers to secure a more compelling offer. 

Get informal offers with trial applications

Advisors whose clients are seeking significant coverage amounts — typically more than $10,000 in premium or $5 million in death benefit — or whose health or lifestyle is likely to impact their coverage options can use a “trial” or “informal” application to assist in comparing products and carriers. A trial application is a simplified version of a formal application that can be used across multiple carriers. This method allows clients to get a better sense of what type of policy and premium they may qualify for from multiple carriers without committing to a specific solution.

Every carrier also has a maximum amount of coverage they can offer an individual applicant and a market capacity limit composed of both a client’s total market outstanding applications and in-force coverage. Formal applications count against this total, running the risk of hitting capacity limits, but trial applications do not. So, for clients who are seeking a significant amount of insurance, carriers that reply favorably to a trial application indicate that they have the capacity and desire to provide coverage. 

Even before submitting a trial application, advisors should cover the basics of underwriting with their clients. Although each carrier has different guidelines, they all share some basic conditions that will affect coverage and cost:

» Preexisting health conditions and chronic illness are regarded as higher risk, as are lifestyle factors like tobacco use and excessive alcohol consumption. 

» High-risk hobbies or occupations can also affect insurability or the cost of coverage.

» Clients wanting more coverage will face a more intensive underwriting process. 

Advisors want the life insurance purchase process to be as painless as possible, so having a backup plan in place is critical. Insurance brokerages can help advisors compare multiple carriers and make a more informed decision. Advisors can also mitigate the risk that a client will be denied or priced out of coverage by working with firms experienced in navigating complex scenarios. 

Life insurance is an inherently complex product. Risk factors, such as complex medical histories, can make the process daunting for even the most experienced advisors. But taking the right steps from the beginning and engaging trusted partners can help not only ease the burden on advisors but also ensure that their clients get the offers they require and the coverage they need to protect their family and their wealth.

Dan Pierson is the head of distribution at Modern Life. He may be contacted at [email protected].