For a lot of clients that fall outside of the traditional life insurance companies approval guidelines the only option if Guaranteed Issue Life Insurance. I used to have a carrier that I could go to for quotes on guaranteed issue but after about 3 years it became apparent that because of the pricing of the product, for the number of people for whom it was the only option, a very small fraction would buy it.
I think it’s important to wrap your mind around guaranteed issue before I propose what I think could be done for a lot of these people. These companies guarantee they will issue a policy no matter what your health situation is. Stage 4 cancer. No problem. AIDS? No problem. Severe COPD? No problem. So how can they guarantee they will issue a policy to what are obviously extremely high risk situations? First they start by making it a graded benefit life insurance policy. There is no death benefit in the first year of the policy and then it can go two ways. It can continue on with no benefit into the second or third year, or it can have an increasing benefit starting in the second year. So to start with, for a period of time the company isn’t on the hook for a death benefit. If a person died during that period their beneficiaries would receive the larger of the graded benefit or the premium paid plus interest.
The other thing that helps them cover this obviously risky decision is that pricing is such that premiums paid will equal the death benefit within 6-8 years and if you’re still around you keep on paying them. They also come in relatively small face amounts of $10,000 to $50,000 with the price generally dictating that most that would buy one of these policies is going to buy a small one. So in summary the company sells a high priced product for which there is little or no risk in the first 3 years and if they do pay a death benefit, it is generally at least half paid for by the premiums that were paid. But even that risk is minimized by the fact that there is a high lapse rate due to the high premiums.
So what if life insurance companies borrowed a little technology from Life Settlement companies, the mortality assumption software. When you sell a policy to a life settlement company part of their process is to determine how long they believe you are going to live and it is almost creepy when they say that based on the facts a person has a 4.7 year mortality assumption. So, if the technology exists to guess mortality that closely, why can’t traditional companies use it to determine mortality risk for those to whom they won’t sell traditional insurance. See, the risk for them with a traditional policy is that you can be a few years from dying, know it, and still convert your policy so that it doesn’t end when the guaranteed level premium does.
What if the industry offered a term policy with no suicide clause and no conversion option? Obviously this isn’t going to be a policy for someone whose life expectancy is short, but rather someone who doesn’t qualify now and because of whatever impaired risk they present, may not be insurable for 5-10 years under a traditional policy. I’m not suggesting that companies just join hands and jump off a cliff with these proposed insureds, but it seems there should be something short of guaranteed issue which, especially when the compiled premium exceeds the death benefit, is seriously unfair.
Bottom line. I’m not sure if my suggestion has the beginnings of an idea. It certainly isn’t a complete solution, but it seems that there must be some middle ground our industry can come up with that is somewhere between accepting too much risk and not accepting any risk at all. Call or email if you have any questions. My name is Ed Hinerman. Let’s talk.
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