When it comes to financial underwriting, there is really just one key question: "Does it make sense?" This is an important question to ask because it is the very thing that underwriters focus on when evaluating life insurance applications for financial risk.
When reviewing an application, an underwriter typically looks at three basic factors: Is there an insurable interest? Is the amount of coverage applied for reasonable and in line with the insured's needs? And is the applicant able to continue paying future premiums?
In other words, does it make sense to issue this policy?
Since these questions must be answered to the satisfaction of an underwriter, a helpful tool on the agent's part is a well-thought-out cover letter, particularly in large-face-amount cases or smaller ones with unusual facts or circumstances.
A clear statement of purpose and need can go a long way toward 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 avoid raising more questions that may complicate and prolong the process. When preparing a case cover letter that involves a business, be sure to explain the specific reason for the application, such as the funding of key-person coverage or a buy-sell agreement.
Next, include a complete profile of the business. In this case, an underwriter will want to know the answers to a number of questions, including the following:
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 address? You want the underwriter to feel that you are presenting a clear, accurate, and thorough picture of the applicant.
2. Who owns the business? Include something about their background and business experience to show 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? Is it a manufacturing company? Is it a 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 also want to attach any current news articles or stories that have been written about the company -- this information enhances an underwriter's overall picture of the business and helps them decide whether the coverage they applied for properly meets their needs.
There are three types of applications that deserve special attention when it comes to financial underwriting:
o 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 "key people" may have a certain level of experience, expertise, talent, and knowledge that makes a substantial contribution to the success of the business. In most companies, there are certain key employees who have a direct impact on specific areas of the enterprise that affect sales volume and profitability.
The amount of coverage granted will vary depending on the key employee's role. The requested coverage should reflect the projected financial impact that will occur if the individual dies, including the expenses the business faces should they need to replace that individual.
o 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 not be someone's "rough estimate." It should be based on fact.
The fair market value of a business can be determined by a formal business evaluation by a third party. While this may be appropriate in certain situations, the most common approach is to provide the underwriter with information from the company's financial statements.
Other sources of financial justification include tax returns, legal agreements, and a needs analysis.
o Personal coverage. What may have been a sufficient face amount 10 or 15 years ago may be woefully inadequate today in replacing a family's loss of present and future income, therefore precluding them from maintaining their current standard of living.
Many leading companies are adjusting their earned-income-factor guidelines to reflect increased family needs should something happen to the primary breadwinner. An example could be a 30 to 40-year-old individual who may have qualified in the past for coverage of 10 to 15 times their earned income.
Today, many companies have adjusted their earned-income factor charts upward to 25 to 30 times earned income for the same 30 to 40-year-old age group.
While these numbers represent general guidelines for the underwriter, their final decision will be based on the totality of the information and facts you've presented to them. This is another reason why the more information you provide and the more questions you answer, the better your chances of a faster approval for the requested face amount.
This upward trend and more liberal approach can also be seen in estate planning sales, as well. 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. Having said that, it is based 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, your and your client's desired outcome can be achieved.
Denise M. Desautels is vice president of brokerage sales at First American Insurance Underwriters Inc. of Needham, MA. She can be contacted at 800-444-8715 or ddesautels@faiu.com. For more information, visit www.faiu.com.
