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Life Health > Running Your Business

The Financial Underwriting Test: "Does It Make Sense?"

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When it comes to financial underwriting, there is one key question: “Does it make sense?” It’s important because this is 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?

In other words, does it make sense?

Because these questions must be answered to an underwriter’s satisfaction, the writing agent should include a well-crafted, detailed cover letter with the application, particularly in large face amount cases or in smaller ones that present unusual facts or circumstances.

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 prevent raising questions that may complicate the process. When preparing a case cover letter involving a business, be sure to explain the reason for the application, such as key person coverage, funding a buy-sell agreement, or some other purpose.

Next, include a complete profile of the business. An underwriter will want to know the answers to a number of questions, such as:

1. 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 Web site address? You want the underwriter to believe you are presenting a clear, accurate, and thorough picture.

2. Who are the owners of the business? Include something about their background and business experience to show that they have a solid track record.
3. What is their percentage of ownership? The actual percentage can be important when it comes to understanding their vested interest in the business.

4. What type of business is it? In other words, what do they do? Do they manufacture a product, or provide a service, or both? Is it retailer? Who are its customers?

5. What is the company’s tax structure? Is it a C-Corp, an S-Corp, an LLC, or a partnership? You will want to attach any current news articles or stories that have been published about the company. This information enhances an underwriter’s picture of the business.

There are three types of applications that deserve particular attention when it comes to financial underwriting:

Key Person. This protection is designed to indemnify the business for the loss of employees whose services are critical to the continued success of the organization. These are people with a certain level of experience, expertise, talent, and knowledge who not only help make the business successful, but would be difficult to replace. In most companies, there are certain key employees who have a direct impact on specific areas of the enterprise that result in sales volume and profitability.

The amount of coverage will vary depending on a key employee’s role. The requested coverage should reflect the projected financial impact that will occur if the individual dies, including the expenses associated with replacing the individual.

Buy-Sell Agreement Planning. The amount of coverage requested and applied for can be based on the percentage of the individual’s ownership of the business. This should be based on fact rather than just someone’s “rough estimate.”

The fair market value of a business can be determined through a formal business evaluation by a third party. While this may be appropriate in certain situations, the more common approach–for companies that have not gone through a formal independent valuation–is to provide the underwriter with information from the company’s financial statements.

In addition, other sources for the financial justification can include tax returns, legal agreements, and a needs analysis performed by the agent himself or herself.

Personal Coverage. Overall inflation has remained relatively low in recent years. Even so, personal insurance coverage purchased 10 or 15 years ago may be woefully inadequate today for replacing a family’s present and future income and allowing them to maintain their standard of living.

Many leading companies are adjusting their Earned Income Factor (EIF) guidelines to reflect increased family needs, should something happen to the primary breadwinner. For example, people in the 30- to 40-year-old age range who may have qualified in the past for coverage of 10 to 15 times earned income can now go up to 25 to 30 times earned income, based on the EIF charts at many companies.

While these numbers represent guidelines for the underwriter, the final decision will be based on the complete package of information and facts presented. This is another reason why the more information you provide and the more questions you answer, the better are the chances for a faster approval for the face amount requested.

This upward trend in income factors and a more liberal approach can also be seen in estate planning sales. The underwriter will look at the client’s current age and health to determine what the future value of the estate would be, based on reasonable growth rate factor.

All of this underscores the fact that underwriting, including financial underwriting, is not an exact science but depends on complete information, accurate facts, and good sound reasoning. By taking the time to assemble the right information and provide an underwriter with a compelling picture of the client, the desired outcome can be achieved.

Denise M. Desautels is vice president of life insurance sales at First American Insurance Underwriters, Inc, a leading life insurance brokerage agency. Ms. Desautels has more than 20 years of experience in the life insurance industry. She can be contacted at 800-444-8715, or via email at [email protected].


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