The AgencyONE Underwriting Team is often asked by our advisors how much insurance their clients can qualify for – “how much can my client get from the underwriter?” or “they’ll buy as much insurance as we can get!”. Underwriters often push back on these questions because of the financial justification issue. Underwriters have a responsibility to financially justify the amounts of insurance being requested which is directly related to the named BENEFICIARY on the application and the measure of the LOSS the beneficiary will suffer upon the death of the insured. The amount of protection being requested should be in line with the expected loss. In this ONEIdea we’ll explore the topic of underwriting financial justification and how it is handled when purchasing life insurance to protect against certain kinds of financial loss.
The reasons to purchase life insurance are many – income replacement, key person, stock redemption/ buy-sell and estate tax protection are just a few. The bottom line is that there is a need for financial PROTECTION and you, the advisor, are selling this protection in the form of life insurance for a VERY IMPORTANT reason – to help secure the long-term financial viability of your clients’ families and businesses.
Your COVER LETTER outlining your client’s case is your best and first opportunity to explain directly to the underwriter HOW the amount of coverage was determined and WHO will SUFFER the calculated LOSS. Then it’s simply a matter of documenting the case.
Income Replacement Coverage
In the simplest of cases, life insurance is purchased for the primary reason of providing income replacement in the event the primary wage earner in the household dies. For example: a 42-year-old married father of two has a 30-year mortgage he has just taken. Will anyone suffer a LOSS upon his Death? YES, of course, but how much loss?
Underwriters have different reference manuals that assist them in determining how much protection is appropriate to cover the loss of a primary wage earner or, in other words, to provide spousal protection. Some underwriting manuals dictate 20 times the primary wage earner’s salary while others are set at 30 times. Often AgencyONE is asked to put identical coverage on a husband AND a wife for the benefit of the family with one spouse listed as the “homemaker” with no wage earnings. The underwriting calculation may vary from carrier to carrier. Call us!
Key Person Coverage
A key person is an employee who is instrumental to a company’s continued success. The requested coverage is based on the LOSS that would be sustained should the key person die. These types of policies are limited by the underwriting guideline “box” which is generally stipulated at 10 times the key person’s compensation. A key person employee making $75,000 annually could typically NOT justify a $1.5 million corporate owner/beneficiary policy – at least not by the underwriting manual – but there are exceptions and special circumstances that may exist with any given case. AgencyONE can help in this determination.
Stock Redemption/Buy-Sell Coverage
When a buy-sell agreement is funded by life insurance, the company or the individual co-owners of the business purchase life insurance on each other’s lives. The company/co-owners are the beneficiaries and will receive the death benefit upon the death of the insured. For example, if the valuation of the company stock is $10 million and the insured owns 10% of that stock, then his buy-out price is $1 million and, in this case, an insurance policy would be purchased with a $1 million death benefit. Simple Math. Simple Underwriting. The only hiccup here is establishing the valuation of the stock and the company itself. Our carrier partner, PRINCIPAL
, has a fantastic underwriting tool and service available at NO CHARGE that will help a company develop an accurate Market Valuation.
Any family, regardless of the size of their estate, would benefit from the purchase of life insurance. The existing estate tax exemption is currently $24.2 million per couple but the Tax Cut And Jobs Act (TCJA) is scheduled to sunset at the end of 2025 and the exemption amount MAY decrease drastically at that time. If the primary reason for your clients to purchase life insurance is estate taxation protection, then you should be discussing with your clients the amount of insurance they think will be required AND speaking with AgencyONE about justification for the requested amount. (See Gonzalo Garcia’s article entitled “Will the Lifetime Exemption Sunset on Jan. 1, 2026?”
for more information about this topic).
However, as one very successful AgencyONE producer notes, “it’s not the taxes, it’s the liquidity!” While very wealthy estates may not have a tax issue, they can have liquidity issues that kick-in upon death of a primary person, either the husband or the wife. A survivorship policy for estate tax purposes may NOT be the right vehicle for your clients since the death benefit only pays on the death of the SECOND person. AgencyONE is working with our advisors to insure more clients with large estates using both survivorship policies and parallel but smaller individual policies which can prefund trust and estate liquidity needs. The underwriters for these policies are quick studies for the justification side of the underwriting if the agent provides the methodology in a cover letter.
AgencyONE is a big fan of the Life Happens
organization whose mission it is to educate and “inspire the public to take personal financial responsibility through the ownership of life insurance and related products.” As professional financial planners and insurance advisors, you are in the position to educate and advise your clients. The Life Happens website
has an impressive array of resources available to use to help you reinforce the importance of life insurance to your clients. It is Life Insurance Awareness Month (LIAM) after all!
It is a known fact that the population of the United States is grossly UNDER-INSURED and the statistics show that most people KNOW they NEED life insurance, but nobody is approaching them to talk about it. With fewer insurance sales professionals asking the questions and providing the products and services, you have a tremendous opportunity to fill this void. As a population, we protect our homes, our cars, etc., but life insurance protection has taken a back seat when it should be front and center in ANY family and business protection equation.
The FOURTH QUARTER is upon us and our advisors and carrier partners alike are focused on YEAR-END. Carrier home offices are already sending their year-end processing notices that outline very specific dates for submission of business before the end of the year. Very shortly, we will also be seeing the year-end underwriting/product push from every direction with special underwriting and sales incentives included. AgencyONE will pass this information along to you as soon as we get it to make sure you are well informed during your client meetings.
Almost any time is a good time to discuss the benefits of life insurance but now – during Life Insurance Awareness Month and the start of the 4th quarter – is an especially good time to have the discussion with your clients and impress upon them the importance of considering life insurance to protect their families, assets and businesses.
AgencyONE has the underwriting knowledge, expertise and carrier relationships to help you and your clients navigate underwriting complexities while satisfying all their life insurance needs. Please call AgencyONE\’s Underwriting Department at 301.803.7500 for more information or to discuss a case.