As an insurance and financial services professional, you have probably submitted hundreds of applications on behalf of your clientele to any number of insurance carriers. You know the ropes and the usual drill. You know what insurance companies are looking for, which companies may be more lenient on persons with certain health issues or those companies that can be heavy-handed with their background checks or phone interviews. And over the years you have learned, perhaps by trial and error, how best to present a risk to an insurer, putting your client’s best foot forward so he or she can successfully attain that important financial protection they usually so rightly deserve. This is especially true with regards to disability insurance.
Your role as a broker or insurance agent is imperative to reading between the lines and addressing certain criteria as to which attributes disability underwriters will favor in a prospective risk and which “red flags” will hinder or halt progress to policy approval. But once underwriting requirements have been fully submitted for review to the insurance company, your influence in the transaction is placed on hold until an underwriting decision is finalized by the company.
So once that application is submitted and out of your hands, what happens behind the scenes and what factors into the ultimate decision-making by the insurance company to either accept or decline a case, leaving your client’s fate in the realm of the relatively unknown?
Similar to life insurance, disability risk analysis is separated into two general objectives: Health underwriting and financial underwriting. A DI underwriter must wear different hats throughout the processing of an insurance application, thinking sometimes as a medical professional and sometimes as an accountant. Our focus here is on the financial underwriting of disability insurance and how the nuances impact the intricate balance of doing what’s best for the paying client and doing what’s best for the insurance company’s bottom line allowing both parties to be mutually content with the outcome.
An underwriter is a person employed by an insurance company as an evaluator of risk. Most disability financial underwriters are certified public accountants or at the very least have strong backgrounds in accounting. Expertise in the position isn’t automatic and can take years to develop as they analyze risk after risk, case after case, while heading toward a common goal of reasonable financial protection of the carrier while providing marketable income-protection benefit programs to consumers.
Financial underwriting methodologies can differ among product lines. Regarding personal disability insurance, underwriters tend to maintain the insured person as their focus in terms of fiduciary needs and over-insurance concerns. Requested benefit amounts are commonly reduced to save the client from overpaying for benefit levels that wouldn’t come to fruition during a claim because of the client’s relatively lower annual income. However, reconsideration of benefits are available once an applicant’s financial situation has improved.
The first step in consideration of the financial insurability of an applicant is the thorough review of the application itself and the financial summary provided by the applicant. In some cases, additional information and proof of insurability is needed—like two consecutive years of recent personal federal and state income tax returns. Benefit eligibility is measured upon a percentage of net earned non-passive income set by the insurance company. Domestic DI carriers penalize applicants for having passive “unearned” income such as rental property or investment proceeds. Specialty-market carriers like Lloyd’s of London oftentimes ignore passive income without reduction of available benefits. If the applicant’s current work year is showing more positive signs in terms of higher income levels compared to previous tax years, financial underwriters will review employment pay stubs, fully-executed employment agreements and sometimes corporate financial statements in the sincere attempt to prove financial insurability among clients whose taxable earned incomes aren’t measuring up to their requested benefit amounts.
Regarding maximum benefit limitations and participation caps, there are differing ideologies when it comes to domestic carrier underwriters and specialty-market underwriters. Domestic carriers usually stick to a strict benefit level of 50 to 60 percent of income with usual monthly benefit caps anywhere from $10,000 to $25,000 depending on the applicant’s age, occupation and income level. Specialty-market carriers are more liberal and flexible in their offerings, allowing benefit levels of 65 to 75 percent with no monthly benefit caps often regardless of age, occupation or income level.
During the financial underwriting process of DI policies, common situations arise that can become suspicious and quite concerning to underwriters. An applicant’s earnings history can show significant income fluctuations and volatility in employment confidence. Spousal business partnerships as well as those who are newly self-employed are cause for concern because income splits may become convoluted to the evaluator, requiring additional investigation. Business owners showing unwavering earnings in industries ripe with historical earnings fluctuations are also of concern, as are persons with multiple sources of income from multiple occupations.
Circumstances may arise in the underwriting process that commonly call for a reduction of available benefit or even the ultimate declination of coverage. Applicants who report gross revenues instead of net income are of concern as well as those that include passive real estate income in their earnings when they are not considered real estate professionals. Another “red flag” is the inclusion of distributions from an S-Corp in personal income instead of non-passive taxable earnings as reported on a K-1 schedule for a given tax year. Also, applicants commonly leave out details of in-force disability insurance policies through other carriers as well as failing to indicate whether said coverage is employer-paid and/or taxable to the insured person. On the contrary, underwriters will seek to advise applicants if their eligibility for higher benefits exceeds the benefit level for which they applied.
Regarding the financial underwriting of business disability insurance, underwriters tend to maintain the applying corporation as their focus in terms of fiduciary needs and over-insurance concerns. Underwriters assume a business owner knows his or her business needs better than the insurance company, and employ supplemental questionnaires to evaluate risk for the underwriting of key person, business overhead and buy/sell insurance policies. The financial underwriting is fairly straightforward as opposed to underwriting personal benefits.
Key person DI underwriting uses a simple multiple of personal annual income as a beginning measurement for financial justification of the benefit. Underwriters will take other factors into consideration in their analysis such as potential fiduciary loss to the company, potential loss of current and future accounts, corporate ownership value of the insured person as well as perceived value of the key person to the company.
Business overhead expense underwriting requires the applicant to provide a detailed listing of average monthly expenses including mortgage payments, utility bills, insurance premiums, accounting services, maintenance costs and certain employee salary expenses.
Buy/sell DI underwriting requires an accurate outline of corporate structure as well as an executed buy/sell agreement and corporate tax returns.
Financial underwriters understand that business arrangements come in all shapes and sizes and no two cases are exactly the same. The same can be said for any disability policy. If the numbers don’t add-up, an insurance company won’t be willing to financially back a precarious risk. Disability financial underwriting isn’t always black and white. It takes interpretation and finesse. It’s more than dollars and cents, more than numbers and percentages, it’s a learned, delicate art of balancing risk and reward.
