There’s the old story about the hungry chicken and the hungry pig who agreed to both contribute to a mutual breakfast. The chicken suggested they have ham and eggs, to which the pig replied, “That’s a contribution for you, but it’s total commitment for me!”
When proposing life insurance we would manage client expectations better if we took time to explain the disproportionate obligations that exist once coverage is put in force.
It would also help them understand the purpose behind those often annoying requests and requirements made by the carrier – particularly in the area of financial underwriting.
Clients often think that a carrier ought to be inclined to sell them as much life insurance as they want. They assume that because the local grocer would sell them his whole stock of fresh radishes, an insurance company ought to respond in the same manner and get frustrated when it does not. The difference, again, is the disproportionate obligations and the economic exposure that remain after the transaction. Except for a change in the type of asset you and your grocer are in the same position before and after the sale.
When a life contract goes into force the buyer is only under a non-binding obligation for periodic premium to keep the coverage going. If paid the carrier is on the hook for a death benefit exponentially greater than the premium if the insured dies. And that exponent is even more extreme when the client takes advantage of low term rates. To use an example from experience with my own offspring: a healthy 21-year-old female can purchase $350,000 for $185 a year. The carrier is at risk for a payment that constitutes just 1/20 of 1% of their exposure.
We can argue that the disproportion is mitigated or eliminated when we look at the big picture. If the carrier has underwritten correctly over a large pool of policyholders it all shakes out in the wash over time; does it not?
And part of correct underwriting is not issuing an amount of coverage that makes an insured worth more dead than he or she is when alive (or as we say in the trade, not increasing the likelihood that insureds will fall down a flight of stairs before their time). The carrier wants to know why you need the coverage and the financial circumstances that justify both the need and the amount, usually in the form of a simple, easy-to-complete financial supplement that must be signed by a qualified third-party advisor for larger cases. Resistance on this will only delay the case and maybe raise the suspicions of the underwriter. Alert your client in advance and respond quickly to request that are made.
We turn over financial information for everything nowadays: loan applications, refinancing a mortgage, getting a new credit, or opening a PayPal account. Don’t let your clients develop a mindset that applying for life insurance is any different.
We specialize in alerting you up front regarding potential underwriting requirements on your case, estimating how much coverage a carrier will allow given your client’s financial circumstances, and helping with bumps in the road if financial justification issues occur. Give us a call.