David H. Kinder, RFC®, ChFC, CLU
Behind the Scenes of Life Insurance Due Diligence
Updated: Jan 18
As an independent insurance professional, sometimes the question comes up "How do you pick the companies you choose to represent?" It's actually not an easy process and choice and it's not based on "who is the cheapest on the market." There are a number of factors and criteria that I consider before choosing to represent an insurance company as a "primary" company (meaning a company I would represent most of the time, unless there are other health considerations or specific policy features that warrant "shopping" it elsewhere).
Company Ratings: This is a double-edged sword. Everyone says they want a top rated company... or do they? Here's the interesting fact: There are currently no more "triple-A" rated companies. Since the United States credit rating was lowered years ago, they are some variation of Aa or Aa+ or something depending on the ratings agency.
However, I have typically found that the highest rated companies OFTEN are the hardest to get favorable underwriting approval done. Why is this? Because that's how they maintain their highest ratings. It's certainly not impossible, but generally speaking, the lower the company rating, the more that these companies WANT more business - even if it's not "Superman-preferred", they'll price their policies, terms and conditions for those they want to serve. So for one company, you might be rated as "standard" and other company you could be rated as "preferred".
Also, I've noticed that the higher the rating of the company, the higher their term life insurance pricing is. They may sell a policy for $1,200 a year when you can get a similar policy with another company (with everything discussed below) for perhaps $800 a year. Why the extra $400? That's a good question. Unless there's a very specific economic benefit for it... why bother paying it?
For me personally, I prefer to represent companies with a minimum of an A- rating or above. There ARE "deals" out there with "B" rated companies and below. They have to "buy" whatever business they get through lower premiums or other policy enhancements because they don't have the financial reserves to be in the "A" category. The lower a company rating is (typically), the higher the risk of a company default and having another company take over the policies.
However, there have been AAA rated companies that have failed to manage their costs and proper management of their general investment account. Bigger is not necessarily 'better'.
Medical Underwriting Process: There are still many companies that require a paramedical exam to check your height, weight, pulse, blood pressure, draw a little blood, and a urine sample. Now these processes really help the insurance company to underwrite the risks in a far more accurate manner - which means that, if you qualify, you'll get better pricing for more favorable risks.
However, it's becoming a new trend that, for amounts up to $1 million dollars, and for specific ages, that just pulling a medical database check, prescription check, and the questions on the application may be sufficient enough! This is GOOD! It makes underwriting far easier and makes it a faster, more streamlined process to get moderate amounts of coverage in a quicker time frame. As expected, for higher amounts and ages, more stringent underwriting is required.
For me personally, I prefer companies that offer this - although the company may still reserve the right to request a medical exam and/or attending physician statement (APS) if something doesn't look quite right so they can make a fully informed underwriting decision.
Living Benefits: In most states, companies offer accelerated death benefits (ADB's) in the event of a terminal illness (expected to live less than 24 months), chronic illness (unable to perform Activities of Daily Living or ADL's), or critical illness (diagnosis of heart attack, stroke, or various stages and types of cancer). California... is a mixed bag. Some of these accelerated death benefits (ADB's) just aren't available on all policies and some may be limited by issue ages. One company in California offers these living benefits, but only up to age 65 at the time of issuance. So these benefits are not necessarily automatically included in policies.
Can I understand the policy and how it performs?
This is more important than you realize with cash value life insurance and annuities. I've seen some rather complex policies out there. If *I* can't understand it and communicate it to the client... what hope does the client have in understanding it later? Sure, it *might* be better for the client than what I recommend... but *better* is subjective. In this case, *simple to understand* is superior to the complex product. I prefer simple, but powerful policies to represent to my prospective clients.
Disability Waiver of Premium and/or Disability Waiver of Stipulated Premium: This is another rider that seems to be available in almost all states... but California. It's just getting harder and harder to find - but certainly not impossible. These riders become active after 6 months of a qualifying disability. Then the insurance company pays your premiums for you... or just waives the costs of insurance on your policy while you are disabled. (I prefer it when the insurance company puts it all into the policy - including cash deposits!) Wouldn't it be nice that, if you became disabled and couldn't work... that your life insurance policy could continue to be funded with the same amount you were originally contributing? If you were putting in $10,000 per year for retirement and college planning... and you became disabled... after six months the insurance company would be putting in that $10,000 per year, every year that you are disabled!!!
Your 401(k) won't do that. Your IRA won't do that. Your 529 college savings plan won't do that.
But life insurance CAN and WILL do that! It's the only financial product that guarantees that what you want to have happen... will happen.
Term Conversion Options: Term life insurance has decreased in price in recent years. Why? One reason is because we're living longer, which means that term is even LESS likely to pay out -statistically and actuarily speaking. This sparks more "term insurance pricing wars" and consumers will benefit from it.
The other reason that term insurance is lowering in price is that they are being 'stripped' of some of the benefits that they used to have. Some living benefits *may* not be available on term life insurance as they are on permanent plans. The right to convert the policy to a permanent policy may either be LIMITED or not exist at all. You may only be able to convert during the first 10 years of the policy (for example), or you may only be able to convert to a "less than stellar policy" that the COMPANY decides you get to have. I prefer term policies with generous conversion options - ideally through the entire duration of the term. Did you know: There are SOME companies that have term policies where, if you became disabled, you could convert the term to a permanent policy AND have the insurance company pay the entire premium while you're disabled including cash values! What's the catch? The catch is... if/when you get better, you're "on the hook" for the entire premium afterwards.
Miscellaneous: There are other factors that don't necessarily directly affect clients. I prefer electronic applications (my handwriting rivals most doctors - but even THEY do electronic prescriptions!), prompt communication with underwriters to turn in underwriting requirements, a long history of doing business, an advanced underwriting desk where I can discuss areas that I don't do regularly - such as business and estate planning. All of those things are part of the value-add for the agents representing them to make their lives a little bit easier.
You may notice that the "cheapest product" doesn't come into play. Yes, the policies need to be competitively priced, but "cheapest" isn't everything. If anything, you can consider the slight increase as a 'peace of mind' payment that you have been dealing with a professional in your life insurance planning. That may be worth an additional 10-20% in premium over "the cheapest", right?
Commissions don't come into play either - although I expect to be well-compensated for placing business with the company. I don't care about "sales contests" as I consider them a distraction to get unmotivated people to do something that they should already be doing... but if I qualify, I'll accept the prize or the trip!
Life insurance and annuities is more about quality and peace of mind rather than price. I have a bunch of factors in mind. Unless there's a medical reason - or a specific policy provision available elsewhere - I'm proud to represent companies that fit what I wish to offer my clients.
This is the value that a professional agent and advisor does "behind the scenes" to help ensure that they are offering quality insurance policies to their clients - not because "it's the cheapest", but because of the peace of mind these policies bring when represented properly by a trained professional.
UPDATE 12-16-2019: This PDF is a recent industry article by Sheryl Moore, CEO of WINK Intelligence (who provides industry data of various topics related to life insurance and annuities). She talks about the dangers of products that are vastly cheaper than the rest of the marketplace... and how that isn't in consumer's best interests long-term.