Your insurance broker has left you a cryptic yet ominous voice message and needs to talk to you. You have applied for life insurance and disability coverage – you are anxious for the results – so you call him back immediately. The broker breaks it to you gently that you have been offered a modified disability policy with a higher rate and with some kind of “exclusion,” and your life insurance will cost 40% more because you did not qualify for those super-cheap “preferred plus” rates he quoted you. In fact, you did not even get a basic “preferred” discount. You think, “What went wrong? Why is this approval process so unnerving and confusing and seemingly unfair?”
Have you ever been denied life, health, disability or long-term care coverage? Or have you been offered a policy but only at a much higher cost than quoted? You think you are a perfect health specimen, but the insurance carriers do not. Naturally you think the worst – that the insurance companies are unfairly socking it to you. Maybe it is the case, but most often it is not. There are specific rules and general guidelines carriers adhere to as they cast a verdict over your health qualifications for life or health insurance. It is just that as an average person, you are not privy to those rules and therefore the uncertainty and fear of the process prevails.
Just like Dorothy Gale pulled back the curtain to expose the simple man who was Oz, we need to examine the process called “underwriting” so what has been inexplicable and imposing may become clear and rational. My reasoning for bringing this to your doorstep is that by better understanding this somewhat mysterious process, you may be better prepared when applying for life, disability and long-term care insurances. This could possibly save you thousands, if not tens of thousands, of dollars during your lifetime. The investment of time you make now may pay off significantly later since you will make multiple purchases of insurance products during your working years as well as during your retirement.
Basic definitions
In general, underwriting in the life and health industry (disability and long-term care are health coverages) is the process whereby an insurance company, through its underwriting department, examines an applicant’s (proposed insured) health profile (medical information) and current financial position (non-medical information) to determine what effect these factors may have on the life expectancy, mortality and morbidity of the proposed insured. This is based on both the objective and subjective elements in the applicant’s risk profile. 
The medical information starts with the medical questions you answer on the application itself as well as from a physical exam performed by an independent medical professional – either a physician or paramedical examiner, depending on the amount of insurance requested – and finally from reports (called “APSs” or “attending physician’s statements) sent to the carrier by physicians and/or other health care professionals the proposed insured has seen in the past. Additionally, a blood draw and urine specimen may be needed as well as a resting or treadmill EKG (depending on the policy size, except long-term coverage which generally does not require a physical exam or other tests).
Financial data may come from a standard background check or credit search and from the questions you answered on the insurance application. Motor vehicle reports may be requested to see if DWIs or DUIs are present in addition to other possible violations of dangerous import, like reckless driving or excessive speeding. Past or present medical conditions may require specific questionnaires, as will certain “avocations” such as scuba diving, mountain climbing, auto racing, etc. For disability insurance, your occupation and earned income matter. For long-term care insurance, the use of any walking aide is highly critical. For business insurance, factors such as the business net worth and income/profit are required.
Lastly, a personal history phone interview (or face-to-face interview for long-term care insurance) may be scheduled for additional details on facts or issues raised on the paper application. All these elements are compiled, then examined by the underwriter to ascertain what risk category you might fall into. That is where the rubber meets the road, and where most disagreements begin. “What, I am not a ‘preferred best’ risk?” “You are excluding disabilities caused by back problems?” “You are declining me for long-term care coverage?” Why? Why? Why?
Underwriting issues, or “mysteries” to the average consumer, ordinarily fall into some general, definable categories, otherwise known as rating classes. Examining a few of these can help you better comprehend how they might affect your underwriting results.
Standard versus preferred (plus)
The rating classes seem to be an area of perpetual misunderstanding, largely exacerbated by the manner in which your agent or broker presented the premium cost to you. Standard rates are the normal rates for a normal risk profile. There are no discounts for good health nor add-ons, or ratings, for present or prior health conditions.
Each insurance carrier has its own guidelines for determining health risks. However, there are about a dozen or so criteria, such as build, blood pressure, family history, driving history, tobacco use, medical or impairment history, cholesterol, Chol/HDL ratio, substance and alcohol usage, aviation (e.g. private pilot), avocations, expected foreign travel, and residency/citizenship. Further, the carriers also review certain financial criteria such as current income, net worth and debt service. Business insurance requires financial data for the business as well, such as recent tax returns, balance sheet and income statement.
Variance around these criteria gives rise to the availability and size of discounts, such as “preferred” (better) or “preferred plus” (best) premium reductions, if “standard” is considered just “good.” In other words, to qualify for preferred or preferred plus (often referred to as “preferred best” or “super preferred”) rate discounts, you have to jump through smaller health and lifestyle hoops. Different carriers set different ranges for the various criteria they impose. As a result, only about 10% to 12% of applicants ever qualify for “preferred plus” rates (but these are the rates the term quote online services normally advertise – the proverbial “gotcha”).
Using one particular carrier as an example, a standard rate implies only needing to jump through rather large health hoops, such that a standard 6-foot male could weigh in at up to 250 pounds, while a preferred risk male could top out at no more than 230 pounds, and a preferred plus risk at a maximum 208 pounds. Obviously, the build table differs for female risks.
Family history
Depending on carriers, to get preferred plus rates, as a further example, your cholesterol may not exceed 220 with or without treatment. For preferred, it is a 250 hurdle, and for standard rates, a much more tolerant 300. Issues involving high blood pressure can be problematic. One carrier’s criteria requires “well-controlled blood pressure, with or without treatment, with no readings in past 2 years greater than 136/86” for preferred plus rates, down to “…no readings of greater than 156/94 in past 2 years” for standard rates.
From an insured person’s perspective, family history injects an element of “punishment” into the underwriting equation. But family history does matter as genetics is a fact of life. If serious heart problems or certain kinds of cancer run in your family, your risk of similar problems is heightened at least statistically.
So we see one carrier’s preferred plus underwriting requires “…no cardiovascular disease or cancer in either parent or siblings before age 60.” Yet the same carrier for standard rates widens the hoop to “…no CV death of more than one parent before age 60.”
For example, if your father died from cardiovascular disease at age 59, you may be prevented from qualifying for preferred plus rates, but that criteria would not disqualify you from standard rates. Insurance companies vary by degree here, so if you get unfavorable results with one company, you may be able to find another with less restrictive rules for family history.
You may feel your health history is without blemish, but one or more of the above criteria may drop you from a highly discounted rate to a mere standard premium – a difference which can result in as much as a 40% to 50% or more premium difference. A 40-year old male applying for $1 million of 20-year term with a well-known carrier, therefore, could wind up with as high an annual premium as $1,510 at standard rates, or possibly $850 at preferred rates, or down to $610 at preferred plus rates. Your broker, as your advocate, can ask the underwriter how close you are to moving up a category, say from standard to preferred, or preferred to preferred plus. If there is room to maneuver, a good broker working with a seasoned underwriter may be able to negotiate a better health category thus lowering the rate. This is also possible if the broker goes to the marketplace for you and does not place all bets on any one carrier’s underwriting results (see Timesaver below).
Pricing
Further, if prior to applying for the insurance, your broker only illustrates preferred plus rates, ask to see preferred rates, and perhaps standard rates as well if you have a past medical or other high-risk history in any of the previously listed categories. Be aware that one company’s pricing may be excellent at preferred plus rates and be atrocious at standard rates for a given age and gender. Knowing this can enable you to get the best rates based on whatever health rating category you qualify for at a given company.
For example, company A may have excellent preferred plus rates for term insurance but company B may be better for standard rates. If you only went to company A, and came back as standard, then you would want to apply to company B since, assuming company B also gives you standard rates, you would pay less at company B – and the cost difference could be substantial. The same holds true for long-term care policies and some disability policies.
If you and your spouse are both applying for life or disability coverage, do not assume the same insurance carrier is right for both of you. You may find one carrier better for the male spouse and a different one superior for the female. This may be especially true with disability insurance so make sure you see rates from several carriers or work with a trusted broker who can scan the marketplace for you before narrowing down the choices. In business insurance situations, where more than one insured is applying for life or disability coverage, again let the marketplace dictate what company or companies you use; one carrier may not be best for all those applying for coverage, especially if there are differing prior medical histories gumming up the works. On the other hand, with disability coverage you can get what are called “list bill premium discounts” of 10% to 15% for multiple insureds (usually three or more) covered through one company. Here is where your broker can help you weigh the pluses and minuses of one carrier versus two or more. One carrier covering both spouses for long-term care is usually better unless one spouse’s underwriting results are way out of line (like Class 2 rated – see below).
You ask, “What if my health or other conditions improve, such as with cancer remission, loss of excess weight, or other improvements over time? Can I go from standard down to preferred or better? Can the opposite happen, i.e., my health deteriorates? Can my rates then go up? As we will discuss in greater detail later, health improvements may allow for a reconsideration of your rate to a lower rate (with medical evidence of the improvement and no other intervening medical issues).
On the other hand, a worsening of your medical history – for example, your hemoglobin A1C ratchets up to 8.0 over several testings (for a diabetic, over 7.0 is problematic), your rate cannot cause an increase. If you were preferred plus, you would stay so. In other words, your rates can be decreased but never increased. We will come back to this when discussing the often-overlooked but critically-important area of guaranteeing your future insurability.
In long-term care, there are ordinarily two types of discounts from the standard (often called “select”) rate. One is for good health (preferred) but the criteria to obtain it are not as extensive as for life insurance. The second discount is for spousal coverage. It is applied when you and your spouse apply for coverage at the same time and may be as high as 15%. If one of you is denied coverage, you may still qualify for a smaller spousal discount, such as 10% instead of 15%. Many carriers allow the smaller discount even if both spouses do not apply at the same time (one may be definitely uninsurable).
Timesavers
If you know your health history is questionable, have your broker complete an informal application or “Timesaver” (BISYS) so he or she can shop multiple carriers to ascertain what health category you might fall into with each carrier. Upon receipt of the results, you can then formally apply to the company that has indicated (though not guaranteed yet) the lowest rate category for you. Worst case scenario, if the Timesaver search results in five or six carriers who all decline to issue, for example, a business overhead disability policy, you will know that you are not being discriminated against by a single underwriter and the coverage is probably not available.
Before moving on, I need to emphasize that the ranges of acceptable health and test results for the dozen or so criteria can vary substantially from carrier to carrier. Any specifics I have stated above are not therefore identical for all carriers but serve only as examples of how insurance carriers might look at health data.
Tobacco versus non-tobacco
Insurance carriers have become a little more lenient in recent years with regard to tobacco/nicotine usage. Some casual cigar smoking is now permitted by certain carriers, while still obtaining non-tobacco rates. But generally, any use of tobacco products, especially cigarettes, will automatically escalate your premium by +/- 40% over the standard or preferred rates (not all carriers will permit a preferred tobacco rating).
For the 40-year-old in our previous example above, the standard tobacco rate would be $4,330 annually, and the preferred smoker rate comes in at $3,040. In other words, the full range of non-rated annual premiums for our 40-year-old male can run from $610 as preferred plus non-tobacco to $4,330 as shown above for standard tobacco rates.
There are a few carriers who will give you a non-tobacco rate to start if you are using tobacco now, but will increase that rate to tobacco usage rates if you do not stop tobacco use in 2 or 3 years. However, you have to prove you have stopped. With the majority of other carriers, you start out with the higher tobacco rate, but you can re-qualify for non-tobacco rates if you stop all tobacco usage for 1, 2 or 3 years and are otherwise in the same good health. The length of time required varies by carrier and by rate category, i.e., attempting to re-qualify under preferred plus rates may require the longer tobacco stoppage, usually 3 years.
A word of caution here – do not make the mistake of temporarily stopping tobacco use (like a couple weeks only) to try to qualify for non-tobacco rates, then going back to normal usage immediately afterward, or simply misstating your tobacco usage entirely. Courts have ruled in favor of insurance carriers so that life insurance death benefits have been denied entirely (and upheld by the courts) where a smoker lied about his nicotine usage when applying for the insurance. Do not forget that your tobacco usage is probably ascertainable from your past medical records or elsewhere. Make sure your broker accurately records the facts of your tobacco usage.
On the other hand, if you are truly only a casual user of nicotine, for example you smoke a cigar only on the golf course with your buddies about a dozen times per year, state those usage conditions on your application so your broker can then shop the marketplace for carriers who will grant you favorable underwriting. I recently was able to get a preferred non-tobacco life policy for a golf partner of mine under such circumstances. A key ingredient to obtaining those lower rates is that nicotine cannot be present in the urine, when tested, and that the statement of highly infrequent usage be inherently true.
Ratings and exclusions
Ratings are extra cost added to the standard rate due to added risk levels. In life insurance, ratings are expressed in tables, such as “1, 2, 3, etc.” or the equivalent “A, B, C, etc.” Each table rating increases the premium by 25%, so that a table D (4) rating doubles the premium from the standard rate. Table ratings usually go no higher than “P,” after which you would be considered uninsurable. Disability coverage generally uses the same table ratings. In long-term care, there may only be two table ratings, “1 and 2,” each adding 15% to the standard rate.
Mortality (life) and morbidity (disability) factors play a role in determining what table rating you may receive, if any. Premiums increase by 25% per table since with each table you stand a 25% greater chance of dying sooner than your life expectancy or becoming disabled sooner and to a greater magnitude.
In life insurance, the easiest way to explain it is this: if premiums in a life policy are calculated actuarially to be spread over your lifetime, but your normal life expectancy is shortened by your medical condition by 5 years, for example, then you theoretically would pay 5 years less. To make up for that 5 year loss of premiums, the insurance carrier needs to charge you more each year to collect the same total premiums, and so a table rating is born. The more your normal life expectancy is cut by your particular medical conditions, the fewer years premiums are likely to be paid, so the higher the premium (rating) needs to be. When you are uninsurable, it means that the insurance company cannot collect enough premium soon enough, so it decides to decline you as a risk.
Extras, postponements and declinations
You may have a condition that causes an insurance company to postpone offering coverage for a period of time, perhaps a year or longer. A knee replacement, for example, may require a 12-month postponement for disability or long-term care insurances until full recovery has been determined. Breast cancer may involve a 1- to 5-year postponement depending upon the staging and other relative factors. At the end of the stated postponement period, assuming no other intervening medical conditions, the coverage may in fact be made available to you.
Table ratings and postponements at times can be imposed together after underwriting review. Take alcohol abuse, for example. Although there are many positive and negative factors that come into play (history of treatment, attendance at Alcoholics Anonymous, DUIs, etc.), with rehabilitation, a proposed insured might expect the following consideration: postponement for one year; 1-2 years from rehab = Table 4; 2-3 years = Table 2, 3+ years = Standard. Remember, all carriers are not alike and this is just one carrier’s way of viewing an alcohol abuse history.
Table ratings can be reduced or eliminated if your health improves, but not increased if your health worsens. However, at the time the policy is issued, the underwriter may indicate that the table rating is permanent, in which case the condition is usually one that is chronic and will not improve your risk over time. No improvement is expected, so the table rating cannot be removed or reduced.
Exclusions and flat extras
If a condition can be isolated in its effect on morbidity or mortality, or may be defined as temporary, an “exclusion” or “flat extra” may be applied to the policy. Exclusions for foreign travel, for example, are not uncommon these days in life insurance policies as certain areas of the world impose additional risk elements for travelers. Exclusions are also used in disability coverage. For example, most disability policies issued today would exclude from coverage back or spinal problems. That means no insurance is paid for a claim arising from a disability caused by back or spinal issues. You need to read an exclusion carefully to imagine what it implies in addition to what it says. If the phrase, “or any complications thereof” is added to the exclusion, you may have a gray area in which a claim could be denied that you think ought to be covered. That does not mean you should not buy the policy. Even a policy with one exclusion may be better than no coverage at all, which by its very nature excludes everything.
My advice is to not accept a policy with an exclusion unless you first check out other carriers to determine how they might underwrite the coverage. Differing results can be possible in a competitive market. It is always worth a try. A last point on exclusions is that they can be temporary (rare) or permanent (more frequent), as stated by the underwriter at issue.
Flat extras add a stated rate per thousand (life insurance) to your policy either for a certain length of time or permanently. A common example is aviation risk. If you are a private pilot, depending on your experience, type of aircraft you fly, your instrument-rating, and average or expected number of flying hours, you might expect a flat extra of $2.50 or higher per thousand of face amount. Stop piloting and the flat extra can come off. My advice if you are thinking of learning to fly is to get all the life insurance you think you will need before you start taking lessons. Afterward, it may be too late. By the way, aviation risk may not be as critical in disability coverage as in life insurance, as the result of plunging out of control from 25,000 feet is usually not a disability issue. It is the sudden stop at the end that is deadly.
Table shaving
Risky avocations may involve flat extras or exclusions. Competitive racing, mountain climbing, scuba diving below 100 feet, hang gliding, etc. are classic examples of such dangerous avocations. Many types of cancer can also warrant a temporary flat extra (5 to 7 years is not uncommon) after some degree of postponement. But with carriers varying their underwriting, and with a competitive marketplace, make sure you survey more than one carrier if the results you get from your initial underwriting do not meet your expectations.
What should you do if you have applied for universal life insurance or whole life insurance and you find yourself rated at Tables 1-3? In this case, ask your broker to find you one of those major carriers whose underwriting program consists of what we call “table shaving.” In most instances, table shaving involves an automatic issue at standard rates even though the medical underwriting would ordinarily classify you at Tables 1-3. This underwriting break is available with single life or joint life (second-to-die) policies by the carriers that offer it. There is no reason in today’s life insurance marketplace for you to have to accept a Table 1-3 underwriting offer for permanent life insurance. What makes it even better is that such breaks are available with some of the biggest and best insurance carriers in the marketplace, all with competitive products to offer.
Value of a credentialed broker
Here is where I state my admitted bias toward qualified and experienced insurance brokers as compared with online or toll-free quote services. Working hand-in-hand with a credentialed broker can make a huge price difference in the ultimate outcome of your insurance underwriting. When calling a toll-free phone number or checking rates online, you may be getting the newest kid on the block whose turn it was when you called in or got online. However, in my opinion, positive underwriting results go well beyond just quoting numbers. Find yourself a professional insurance broker or financial planner who can effectively and objectively represent you, as your advocate, in the insurance marketplace, such as finding you a company with table-shaving capabilities, should you need such underwriting assistance. In the underwriting foxhole, you want the best partner you can have close by. I do not see calling a toll-free phone number and talking to a stranger as cutting it. That stranger online likely will not be around when your policy becomes a claim and your family needs professional help. But then again, that is my admitted bias.
I have gotten you partially behind Oz’s curtain, but only partially. In the next part of this article, I will cover ways to protect your insurability, the concept of insurable interest, why term conversions may be your friend, preparing for best result on your insurance physical, how you can help avoid delays in the underwriting process, shopping companies for best results, protecting your children’s insurability, the Medical Information Bureau, etc.
If you would like to discuss present, past or future underwriting results or possibilities, please send me an e-mail at kenneth.rudzinski@lfg.com. No obligation.
For more information:
- Kenneth W. Rudzinski, CFP, CLU, CHRC, CASL, CAP, is a registered representative of the Lincoln National Advisors Corp. Securities and advisory services are offered through Lincoln Financial Advisors Corp., a broker/dealer (member SPIC), and registered investment advisor. Insurance is offered through Lincoln affiliates and other fine companies. Rudzinski is located at 2036 Foulk Rd., Ste. 104, Wilmington, DE 19810; (866) 529-1320; fax (302) 529-1324; or e-mail Kenneth.Rudzinski@lfg.com.
- Lincoln Financial Advisors Corp., or its representatives, do not give tax or legal advice. The information in this article is from sources deemed reliable. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.
