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Situation: We have all heard the LIMRA statistics that 4 in 10 adults have no insurance coverage and that only 3 in 10 individuals feel they have sufficient coverage. Despite these grim statistics, for financial advisors the hardest part in working with clients is getting them to purchase the life insurance they need. However, once the buying decision is made the next most difficult challenge may be getting the life insurance carrier that is underwriting the case to issue the amount as requested. Basically, when an individual applies for life insurance coverage he or she is asking an insurance company to take on the risk of paying a claim at some point in the future. Since the claim can be large it’s important that the carrier not take too great of a risk. The underwriting department of a life insurance carrier is responsible for evaluating the risks of a particular applicant. While there are numerous factors that are considered by a carrier when underwriting a life insurance policy, the evaluation can be divided into two major categories. First, the underwriter decides how much premium the insured should pay based on the insured’s health and avocations. Second, the underwriter will decide how much coverage the applicant should receive based on the purpose/need for the insurance. Given the focus on obtaining detailed health information about the proposed insured financial advisors are well aware of the first category – the medical underwriting aspect of the underwriting evaluation. However, many advisors are not familiar with the second category - the financial underwriting aspects of getting a case approved. This can lead to frustration when underwriters ask more questions after a case has been approved medically, or worse, when an application gets rejected due to “lack of insurable interest.” Fortunately, a rejected application due to financial underwriting can be corrected when the appropriate information is provided to the carrier. This Counselor’s Corner will provide our readers with an understanding of the kind of information needed and the typical guidelines used by carriers to determine how much coverage the applicant should receive.

Solution: Packaging a case from a financial underwriting perspective is critical to getting a policy issued, particularly when large amounts are being requested. Each insurance company is going to have varying medical as well as financial underwriting policies that can impact the results that a particular insured can get. By knowing the typical guidelines and the kind of information a carrier wants to see to support the face amount requested, a financial representative can better position a case. The attached chart provides general guidelines used by carriers in determining the face amount of coverage. As always a good cover letter explaining the need/purpose of the insurance and an explanation about how the face amount of insurance was determined, along with the supporting documents is helpful in getting a case approved.

Counselor’s Corner

Financial Underwriting: The Often Overlooked Hurdle

Financial Underwriting Guidelines

Financial Underwriting is a key part of the underwriting process, but often left until after the medical underwriting is complete. A good cover letter should help the underwriter understand the case, including:

• Reason for the insurance (purpose)

• How the amount applied for was determined

• Total amount of insurance on the insured’s life with all companies

• Pending applications and life insurance to be replaced, if any The information summarized below is general in nature based on composite data from several carriers. It is only designed to provide general guidance, and specific carrier guidelines can vary and may differ on their overall financial outlook. If you have a case that falls outside these guidelines contact Terri Getman ext. 230.

Insurance Purpose

General Face Amount Guidelines Policy Structure Suggested Documentation

Income Replacement

Ages Income Factor Ins. Amount

Under 40 $ X 30 = $ 40 – 45 $ X 25 = $ 46 – 55 $ X 20 = $ 56 – 60 $ X 15 = $ 61 – 70 $ X 10 = $ 71 – 80 $ X 5 = $ Over 80 $ X ? = Individual Basis

▪ Typically the insured is the owner and spouse is the beneficiary

▪ Alternatively trust or spouse may be the owner

▪ CAUTION: insured, owner, beneficiary each different person/entity

▪ Documentation showing income

▪ If the face amount exceeds the guidelines information about the family such as number of children, age of children, any special circumstances (i.e., child with special needs)

Spouse with No Earned Income not Estate (Use only if spouse is definitely not working outside the home)

$1 Million or Less face amounts Amount equal to income earning spouse

$1-$5 Million, Under Age 70 Spouse The non-income earning spouse may qualify for greater of $1 million or 50% of income earning spouse $1-$5 Million, Over Age 70 Spouse Individual basis is application is over $1 million

▪ Typically the insured is the owner and spouse is the beneficiary

▪ Alternatively trust or spouse may be the owner

▪ CAUTION: insured, owner, beneficiary each different person/entity

▪ Documentation showing income of income earning spouse

▪ Insurance in force and pending on income earning spouse

Juvenile Coverage

▪ No more than 100% of parent, less coverage permitted at younger ages

▪ Special rules apply in NY

▪ Typically parent is owner ▪ Amount of coverage on children should be the same

▪ Insurance on parents/ guardians must be greater

Debt Repayment (Personal)

▪ May qualify for 100% of mortgage balance ▪ Additional amounts to cover other personal

debt may be possible

▪ Typically the insured is the owner and family is the beneficiary with collateral assignment to lender/bank

▪ Details of the loan(s) such as amount, term, interest rate

Insurance Purpose

General Face Amount Guidelines Policy Structure Suggested Documentation

Estate Settlement Costs (State & Federal Death Taxes, Final Expenses)

▪ Value of estate over $5M net worth for single/ $10M for couple times 50% = settlement cost

▪ Settlement costs projected 8 – 10 years at reasonable rate of growth (approx. 4% - 6%)

▪ Greater growth projections may be possible ▪ Expected inheritance can be included in value

where it’s likely to occur in near future

▪ Typically trust is owner and beneficiary

▪ Other structures possible - see Terri

▪ Net worth statement ▪ Estate calculation ▪ Description of plan

IRD Costs (Qualified Plans Annuities, Nonqualified Plans)

▪ Income tax costs on IRD assets projected 8 – 10 years at reasonable rate of growth (IRD times 40% = face amount)

▪ These cases are generally sold as “leveraging or maximizing IRD asset”

▪ Can be structured a number of ways but must make sense

▪ Documentation showing value of IRD assets and sufficient other assets & income

▪ Difficult to max

Charitable Donation

▪ Based on past giving times life expectancy ▪ Personal insurance needs have been satisfied ▪ Greater amounts may be possible on an

individual basis

▪ Typical structure the charity is owner and beneficiary

▪ Can have insured as owner with charity as beneficiary

▪ Historic contribution information (services and money)

▪ Difficult

Charitable Remainder Trust

▪ Fair market value of the contributed asset ▪ Typically owner and beneficiary is a trust

▪ Other structures are possible, but needs to make sense

▪ Details of the charitable trust

▪ Documentation showing value of contributed asset

Buy Sell Arrangement

▪ Fair market value of the business with reasonable rate of growth times percentage of ownership

▪ (EBITA number X 10) X owners interest ▪ All owners should have coverage unless

reasonable explanation for no coverage

▪ Cross-purchase structure – other business owner is owner and beneficiary

▪ Entity purchase structure – business is owner and beneficiary

▪ Other structures possible - see Terri

▪ New business < 3 yrs consider personal instead

▪ Business financial statement or appraisal

▪ Details of buy sell agreement

Debt Repayment (Business)

▪ Generally not able to acquire 100% of loan ▪ Amount of coverage permitted often varies

depending on a number of factors such as whether owner personally responsible.

▪ Typically business is owner and beneficiary with collateral assignment to lender/bank

▪ Can have insured owner with family as beneficiary with assignment

▪ Loan document/ details of the loan(s) such as amount, term, interest rate

Key Person Coverage

▪ Five to ten times annual compensation including executive perks

▪ Large face amount can be considered based on documented impact to the business

▪ Business is owner and beneficiary ▪ Other structures are possible, but

very unusual - contact Terri

▪ New business < 3 yrs consider personal instead

▪ Business > 3yrs documentation showing income & title of position/ description of position

This material has been prepared to assist our licensed financial professionals and clients’ advisors. It is designed to provide general information in regard to the subject matter covered. It should be used with the understanding that we are not rendering legal, accounting or tax advice. Such services must be provided by the client’s own advisors. Accordingly, any information in this document cannot be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code. Insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Policies and or features may not be available in all states.

Securities and Insurance Products: Not Insured by FDIC or Any Federal Government Agency. May Lose Value.

Not a Deposit of or Guaranteed by Any Bank or Bank Affiliate.

©2017 Diversified Brokerage Services, Inc. 5501 Excelsior Blvd., Minneapolis, MN 55416-5153 www.DBS-LifeMark.com

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