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Life Health > Life Insurance

The advisor’s role in financial underwriting

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Compared to the attention that the life insurance industry gives to medical underwriting, financial underwriting may seem less important, something like ‘the little finger on the left hand’. But what happens on the medical side goes a long way in determining whether a client’s application is accepted, rejected, or rated.

With so much focus on obtaining detailed medical information, many advisors may view financial underwriting as more procedural, a lesser hurdle, and not a serious cause for concern.

If a producer feels this way it’s unfortunate. Since financial underwriting can play a key role in determining the outcome of a case, along with medical, product and quality issues, it deserves serious attention, starting with the selection of the insurance company.

Each insurance company has its own algorithms that help in determining the financial need for the requested coverage; therefore, it’s essential to understand a company’s formula so that the case can be constructed appropriately.

In the due diligence (or investigative) phase, the objective is to develop a clear understanding of the financial underwriting possibilities. One way to gain insight into the thinking of a company’s underwriting department is to speak with someone in the company’s advanced marketing unit to develop an understanding of what can work when making a presentation.

Here are ways in which advisors can contribute to obtaining the desired coverage:

(1) Ask the relevant financial questions. No presentation should be drafted before obtaining as many relevant financial details as possible pertaining to the history, objectives, and purpose of the desired coverage. All of this goes into building the best possible case for obtaining the requested coverage.

To do this means asking questions and getting accurate and complete answers, just as it does with medical underwriting issues. Needless to say, this can become somewhat problematic unless there’s excellent communication between advisor and client.

(2) Draft the financial underwriting cover memo. With the due diligence completed, it’s time to draft the cover memo for the underwriter, presenting the financial aspects of the case, and taking into account the insurance company’s financial underwriting requirements.

However — and this is crucial to making the process successful — it’s important for the advisor to actively manage the client’s expectations by keeping the individual involved in the process. If the broker understands what is acceptable and necessary for explaining the need to underwriting, the chances of success are much better. Insurance companies use a variety of methods to verify the financial information that is submitted. (3) Avoid surprises. It’s also helpful to recognize the importance of being prepared for the unexpected. For example, it can be dangerous to make inappropriate assumptions about a case or to overpromise clients.

It’s also worth remembering that both large and small cases can run into surprises. Underwriters may change requirements or re-underwrite a case after having approved an application when the agent asks for additional coverage.

To avoid this from occurring and upsetting the client, do everything possible to anticipate the total amount being underwritten. At other times, brokers continue to develop and work a case with the client in ways that generate a need for a larger face amount that can put it in jeopardy.

How to present cases for financial underwriting

Business cases

  • Have a clear understanding of the business need that justifies or requires that the insurance be offered and be able to articulate this need clearly and succinctly.
  • Draft a cover letter that gives an underwriter a clear and complete understanding of the coverage that’s needed and why.
  • Have a good grasp of the underwriting methodology for the carrier selected so you can present a formula that the company will embrace and agree to make an offer of the entire amount.
  • Be familiar with sample formulas used for particular business needs: key person, business continuation planning, employee personal benefits, loan indemnity needs, and retirement planning needs.
  • Recognize that insurance companies can use a combination of formulas and bundle needs to meet the total line desired. Assume, for example, a lender wants an assignment of insurance equal to 100 percent of the amount of its loan, but the insurance company only allows 80 percent insurance coverage toward the loan. The offer needs to provide for 100 percent. To accommodate the situation, the carrier agrees to insure the key person with coverage equal to 10 times his income. This additional amount was sufficient to cover the 20 percent loan repayment insurance gap for the first need.

Personal cases

  • Historically, personal family requirements have utilized capital needs analysis, need programming or simple replacement of income calculations to establish the financial basis for coverage. Life insurance companies usually set the maximum coverage they will accept for the total line based on a multiple of annual earned income. The multiple selected starts at 30 times for younger insureds and diminishes for older clients.  
  • Legacy planning, liquidity planning and estate and income tax planning needs are handled in various ways depending on the particular insurance company. Again, it’s prudent to discuss the issues to determine the insurance company most appropriate for submitting a case.
  • Legacy planning for senior adults with modest assets and income can be fraught with pitfalls. Insurance companies want to know the insurability interest and understand the need, source and appropriateness of the funding. These cases can require company shopping to find one that’s comfortable with the case details.

There is no question about the significance of the role of financial underwriting in life insurance. At the same time, it would be unrealistic to expect advisors to become financial underwriting experts. However, being aware of how underwriters think, what they expect, and what to avoid is essential for an advisor to serve the best interests of a client.

If an advisor’s due diligence is thorough and thoughtful when working a case, the final presentation to the insurance company has an opportunity to be compelling, persuasive and successful.


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