In my many presentations and communications with agents, firms and producers, I cannot emphasize enough the value and peace that they provide with each policy placement. In my view, the greatest gift that a person can provide (aside from prayer) is the gift of life insurance.
Life insurance simply says to your beneficiary that you care about them so much that even if untimely death were to occur, you want them to continue their productive lives in the same manner as they have become accustomed to.
Now, let me focus on an essential part of that statement—“the same manner as they have become accustomed to.” The basic premise of life insurance is to replace loss of financial support in case a person who is responsible for that support encounters an untimely death. The premise supports the continuation of a lifestyle or business in the same position as if the person were alive. What this does not mean is that any person, place or thing incurs a financial windfall or substantial gain as the result of that death.
Here’s an example: Before I was married, my best friend and I had been as close as sisters since the second grade. I had no children and had no debt (Oh! Those were the days!). Therefore, if something would have happened to me, the only financial loss would be to my next of kin—my parents—and that would be related to funeral/burial expenses (and Louisiana funerals can get pretty expensive!). As much as I loved my best friend and trusted her with all that I had, if I would have purchased a life insurance policy naming her as beneficiary and/or owner, the monies gained from that benefit would have resulted in her incurring a financial gain at my demise. To change that perspective, let’s assume that both she and I were guarantors on a loan in the amount of $500,000. We were equally responsible for that loan and wanted to get coverage for that liability. The maximum (and I emphasize maximum because some carriers only consider up to 80 percent of the loan value unless it is collaterally assigned) would be $250,000. Therefore, if I wanted to purchase such coverage and requested a face amount of $1million, then inevitably my beneficiary (best friend) would incur a financial windfall at my demise. As much as I would have loved for her to live lavishly off of my bad luck, essentially it puts a bullseye on my back as the beneficiary may be rooting for or even try to rush my demise. In other words, I’d be worth more dead than alive and $1 million is pretty enticing for many people.
So how and why does an insurance company care about who and how much coverage a person wants or can even afford? The justification is that if the insurance company accepted the contract that would result in a financial windfall for someone, and that policy played a role in the applicant’s early demise, then the estate or family of the insured could hold the insurance company as partially liable in the person’s death because they played a part in “putting the bullseye on the applicant’s back” and possibly putting them in harm’s way for the insurance proceeds.
Financial justification doesn’t just apply to personal coverage, it applies to business coverage as well. If all partners of a buy/sell agreement are not insured equally according to their investment, then essentially the business would incur a windfall at the demise of one of the owners. If a keyman is over insured and not in correlation with the benefit that they provide for the company, then not only will the company incur a windfall but they may be able to replace that person quickly and at lower cost and thus recognize a further benefit from that person’s demise.
In order to make sure that, as an agent, you are properly ensuring the financial needs of each applicant, you have to start with the purpose of the coverage and the finances that they want to protect. I said protect…not increase. The best way to do this is to make sure that when you are with your applicant you cover all of their bases, which includes protecting personal and business assets, checking the financial justification calculations, and then noting those steps on a detailed cover letter so that an underwriter can see how the sale was made and the expectations that go along with it.
Without financial justification, you could also be doing harm to your applicant by putting them in a position to pay for coverage that exceeds their affordability—all in an effort to “make sure that someone is taken care of.” But that’s just it...every person wants their interests (family, business, etc.) to be taken care of if something were to happen to them. However, what they may not want is to be more valuable “after life” than while living it. Consider also the effect on the insurance company if an applicant has to choose between continuing a policy that they really can’t afford and the costs of daily living. Most people will allow the policy to lapse. With an increased lapse ratio, an insurance company does not meet its financial goals and their remedy may be to increase rates across the board. All because agents did not rely on the basic premise of life insurance—to protect against financial loss and not ensure financial gain.
Overall, just like the examination of medical, avocation, aviation, and other risk factors an applicant may present, the financial justification must be considered and in accordance with the potential financial loss. Although many TV shows and movies create situations which may seem to be unrealistic, there are instances in which the storyline is based on real life situations that even include “hitmen for hire.” Make sure that as a financial professional you are focusing on protecting families and businesses, and not creating real-life storylines for television shows with bad lighting! After all, no one wants to look bad on TV!
Life Insurance—To Protect and To Insure!
Do you have an underwriter with experience on your side?
For financial professional use only. Not for use with consumers.
Partners Advantage Insurance Services and their representatives do not give tax or legal advice. The material in this article is provided for informational purposes only and should not be construed as tax or legal advice. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of publication. However, these laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Partners Advantage’s interpretations. Additionally, the information presented here does not consider the impact of applicable state laws upon clients and prospects. Guarantees and benefits are based on the claims-paying ability of the issuing insurance company. Keep in mind that most life insurance policies require health underwriting and, in some cases, financial underwriting.
has been vice president of underwriting and development at Partners Advantage and Platinum Partners since 2013. Her chief responsibilities include directing and developing underwriting strategies, as well as a comprehensive underwriting training to several divisions of the company that serve independent agents and to Platinum Partners agencies nationwide. Prior to joining Partners Advantage, Morris gained extensive experience from her work in the underwriting departments of several insurance carriers, as well as from her background in the brokerage arena as assistant vice president of underwriting advocacy. Morris can be reached by email at: firstname.lastname@example.org. Learn more at www.PartnersAdvantage.com.