The Good, The Bad And The Uninsurable

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There always has been a wide range of underwriting levels for life insurance products, and the range seems to get wider and wider.

To cover the level of expected mortality rates across this range, life insurance companies have offered products that go from pre-need life insurance all the way to the super-preferred, high band term life insurance.

The premiums that support these policies also vary widely. The premium rate per $1,000 of face amount on a final expense policy may be more than 10 times as great as the premium rate on a fully underwritten plan. Yet, each of these products fills a specific need in the marketplace.

As the physical health and financial needs of the customers vary, so, too, do the levels of underwriting and mortality risks and, therefore, premium levels. This article discusses the products available at different underwriting levels.

Products. At the low end of the range according to average face amount and at the high end of the range of expected mortality is the pre-need product. Pre-need life insurance is generally sold to older insureds who want to pre-pay for their funeral costs. Because the face amounts are generally below $10,000, there is no medical underwriting. The policies are sold as guaranteed issue or simplified issue. The simplified issue policies include a few questions on an application; if all of the questions can be answered no, the sale will go through.

The next type of product is called final expense, or senior whole life products. These are generally sold as simplified issue and usually include a few more medical questions on the application than the pre-need product. The face amounts are generally less than $50,000 and are sold to the senior market.

Next are the low face amount whole life, universal life and term life insurance products that have 2 underwriting classes. These have more medical questions on the application and may include a para-medical exam requirement, too. The face amount on these products usually ranges from $50,000 to $150,000.

Products that include more underwriting classes and more medical underwriting form the next group. Here, the underwriting may include a blood test, attending physician statement and specific lifestyle exclusions.

All of these products cover a specific need in the marketplace, and each has its own expected mortality rates. To cover these mortality risks, the products also have very different premium rates. The accompanying table shows a sample mortality rate for a 55-year-old male who just has been issued a policy; it also shows the corresponding life expectancy. While the difference in mortality rates shown in the table may be shocking, it demonstrates the ability of insurance companies to cover as many insureds as possible.

Uninsurables. For products that require underwriting, there always will be some applicants who are rated uninsurable. In fact, at most life insurance companies, 3% to 7% of life applications fall in the “not accepted” category. For these customers, the only alternative is to find a guaranteed issue policy that has a small face amount. Usually the face amount is just enough to cover funeral costs, and it may need to be a single premium policy.

Substandard Policies. Almost all life insurance companies offer policies on a substandard basis. Usually the premiums for these policies will be a certain percentage of the normal premium rate. The premium could be 2, 3, or even 4 times as high as a standard policy.

A few insurers have tried to create a niche in the substandard insurance market. The risks are high. However, if the firm has a quality underwriting staff, the premiums can be such that they offset the higher mortality.

Older Age Mortality. As the baby boomers are getting older, more and more emphasis is being placed on older age mortality. The problem is that there is not as much experience at the older ages. Therefore, insurance companies have a much wider range of expected mortality.

Most of the differences in mortality studies within the insurance industry are at the higher ages. While the amount of insurance issued for a typical company at ages above 70 may only be about 15% of the total, the present value of death benefit claims for that same age group is over 65%. This demonstrates the importance of insurance companies needing to become more comfortable with the older age mortality.

While a wide range of expected mortality exists, the life insurance industry is responding, meeting the needs of the consumers, by offering a wide range of insurance products. With careful analysis by the underwriters and actuaries, these companies will be able to support the future death benefits.

, FSA, MAAA, CLU, ChFC, is a consulting actuary with Milliman Inc. in the Indianapolis office. His e-mail is keith.dall@milliman.com.


Reproduced from National Underwriter Edition, November 11, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.