Life Insurance

The Financial Underwriting Test: Does It Make Sense?
by Denise M. Desautels

There is one key question when it comes to financial underwriting: Does it make sense? It’s the question underwriters focus on when evaluating life insurance applications for financial risk. The underwriter looks at three basic factors:

1. Is there an insurable interest?
2. Is the amount of coverage applied for reasonable and in line with the insured’s needs?
3. Does the applicant have the ability to sustain future premiums?
Since these questions must be answered to an underwriter’s satisfaction, it is helpful to have a well thought out cover letter, particularly for large face amount cases or in smaller ones with unusual facts or circumstances.

Providing a clear statement of purpose and need can go a long way in establishing an accurate picture for an underwriter. A major objective of the cover letter is to make a good impression on the underwriter. This can help mitigate unnecessary delays and avoid raising questions that may complicate the process. When preparing cover letter involving a business, explain the reason for the application, such as getting key person coverage, funding a buy-sell agreement, or some other purpose.

Next, include a complete profile of the business. The underwriter should feel that you are presenting a clear, accurate, and thorough picture. An underwriter will want to know the answers to a number of questions, including the following:

• What is the history of the business?
• When was it founded?
• Is it a start up or has it been in business for a long time?
• What is its website address?
• Who are the owners of the business? Include something about their background and business experience to show a solid track record.
• What is their percentage of ownership? The actual percentage can be important when it comes to understanding their vested interest in the business.
• What type of business is it? Is it a manufacturing company? Is it a retailer? Who are its customers?
• What is the company’s tax structure? Is it a C-Corp., an S-Corp., an LLC, or a partnership?
You should attach any current news articles about the company. This information enhances an underwriter’s picture of the business.
Three types of applications deserve special attention when it comes to financial underwriting:

1. Key Person -- This protection is designed to indemnify the business for the loss of employees whose services are critical to its continued success. These people may have certain expertise and talent to make a substantial contribution to the success of the business. In most companies, certain key employees directly affect sales and profitability. The amount of coverage will vary depending on a key employee’s role. The requested coverage should reflect the projected financial effect if the person dies including the expenses of replacing the person.
2. Buy-Sell Agreement Planning -- The amount of coverage requested and applied for can be based on the percentage of the person’s ownership of the business. This should be based in fact. It should not be a rough estimate. A formal business evaluation by a third party can be used to determine the fair market value of a business. While this may be appropriate in certain situations, the most common approach is to give the underwriter information from the company’s financial statements. Other sources for the financial justification can come from providing tax returns, providing legal agreements, and having the advisor perform a needs analysis.
3. Personal Coverage -- What may have been a sufficient face amount 10 or 15 years ago may be woefully inadequate to replace a family’s present and future income in order to maintain the current standard of living.

Many leading companies are adjusting their earned income factor guidelines to reflect increased family needs in case something happens to the primary breadwinner.
An example could be a 30- to 40-year-old person who qualified in the past for coverage of 10 to 15 times their earned income.

Today, many companies have adjusted their earned income factor charts upward to 25 to 30 times earned income for the same 30 to 40 year old age group. While these numbers are guidelines for the underwriter, the final decision is based on the all of the information and facts presented. This is another reason why the more information you provide and the more questions you answer, the better the chances are for a faster approval for the face amount requested.

This upward trend and more liberal approach can also be seen in estate planning sales. The underwriter looks at the client’s current age and health to determine the future value of the estate based on a reasonable growth rate factor. All of this underscores the fact that underwriting (including financial underwriting) is not an exact science. It is based on complete information, accurate facts, and sound reasoning.

By taking the time to assemble the right information and provide the underwriter with a compelling picture of the client, you can achieve the desired outcome.
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Denise M. Desautels is vice president of Brokerage Sales at First American Insurance Underwriters, Inc. of Needham, Massachusetts. A former Olympic athlete, Desautels has more than 20 years experience in the life insurance field. She can be contacted at 800-444-8715, via email at ddesautels@faiu.com, or on the Web at www.faiu.com. First American Insurance Underwriters is a Needham, MA-based national life brokerage firm specializing in serving high-end producers and working on complex cases.