There’s More Than Meets the Eye With the ‘Simplified’ Life Insurance Sale

Fewer Americans are insured than ever before and most insurance agents avoid the lower and mddle-market segments.

“No one wants to buy insurance until they can’t buy it.” All too often, it takes the shock of a health problem for people to recognize the need for life insurance coverage. Unfortunately, this is the worst possible time to buy it since the premiums are so much higher. Worse yet, coverage may be denied. Even so, that’s not the end of the line. For clients who still want life insurance but can’t qualify for a traditional plan, the remaining option is to apply for a plan with limited or no medical underwriting.

It’s this ‘last resort’ situation that comes to mind when talking about guaranteed and simplified issue plans. That’s a narrow view, since this particular marketplace is multidimensional and offers many possibilities. Taking a broader perspective, the variety of available products and what they can accomplish for clients opens up an entirely new market for advisors.

Types of products and their niches

Guaranteed Issue
Guaranteed issue products are really limited underwriting life insurance plans or, popularly, ‘final expense’ plans. A true guaranteed issue plan asks minimal medical questions, such as whether the client has AIDS/HIV or a terminal diagnosis. As long as clients can answer ‘no’ to the medical questions and either they or their legal guardian can sign the application, coverage is guaranteed.

These plans are usually limited to a maximum face amount of $25,000 and most cap the issue age at 80.The plans are typically issued on a cost per thousand basis that is determined solely by the age of the client. There’s an initial 2-4 year ‘graded benefit’ period in which the death benefit is determined either by the premiums paid plus an interest rate or by a fixed percentage of the total death benefit. Once past the graded benefit period, the total face amount is paid. In addition, the plans typically have a cash value account available to the client.

Individually, older clients buy these plans to offset funeral and probate expenses, while those with mental conditions or chronic diseases that exclude them from traditional coverage also purchase them.  Alternatively, many funeral homes and cemeteries offer these plans in a bundle of services or they can be marketed through associations and affinity groups as an added benefit for members.

Unfortunately, these plans can lead to abuse by agents looking to ‘make a quick buck.’ In the past, some agents have marketed them to healthy clients who end up paying a comparatively expensive premium just because the agent wanted to make a quick sale. Such abuse has given rise to some of the stigma surrounding the products, and has caused some state insurance commissioners to either eliminate or severely curtail the sale of the products.

Simplified Issue
Simplified Issue plans require slightly more medical information compared to guaranteed issue plans, but the carriers rarely require evidence outside of the application and possibly a telephone interview. Medical conditions, such as dialysis and COPD, which could cause a client to be declined for traditional life insurance coverage are accepted by many simplified issue plans. If a carrier requires a phone interview, it’s typically just to confirm the answers to the questions on the application.

From day one, these plans are generally level benefit with no graded benefit period. They can be issued in face amounts up to $100,000 for both term and permanent coverage. Should a client want additional protection, multiple carriers can be ‘stacked’ on top of each other to reach the desired coverage. The premiums for simplified issue plans are typically comparable to a table 4 to a table 12 on a traditional plan, depending on the amount of medical evidence required. Therefore, they’re often used for clients with some health issues but who can answer ‘no’ to a majority of the medical questions.

A wide range of products are available that come under the umbrella of ‘simplified issue’ plans, so it’s important to review several plans and shop the market to find the policy that’s best for the client. Just because a client doesn’t qualify for a particular simplified issue plan doesn’t mean they won’t qualify for another plan since each carrier asks slightly different questions.

Express Issue
Express Issue plans require the most comprehensive underwriting, which makes them the most difficult to qualify for in the guaranteed issue/simplified issue marketplace. Essentially, Express Issue plans are fully underwritten, aside from the fact that there is no paramedical exam required and APSs are rarely ordered (typically if there is discrepancy in information obtained from the application and the other sources).

There’s a full part II on most applications, which asks all of the medical questions on a traditional insurance application. In addition, these plans often require the client to complete a 30-45 minute phone interview conducted by a trained insurance company underwriter. Finally, carriers will run both an MIB and MVR check and, increasingly, they’re checking the prescription database.

These plans are available in face amounts up to $350,000, which is expected to increase as more companies enter the market. Carriers benefit from the fact that it’s unnecessary to invest time and money ordering doctors’ records, while clients and agents benefit from having policies issued in 24-48 hours after an application is submitted.

The typical issue ages are 20 to 70 and both term and permanent policies are available. In most cases, the premiums for Express Issue plans are on par with a Standard or Standard Plus rate with traditional insurance plans. These plans tend to appeal to clients without health concerns, but who either don’t want to deal with the average 4-6 week insurance underwriting process or are unwilling or unable to complete the lab work for a traditionally underwritten plan. They are also ideal for an agent who doesn’t want to deal with application administration or who is unfamiliar with the underwriting process.

Once the application is taken, the process is completely ‘hands-off’ for the agent until the policy is approved and issued, usually within a couple of days of submission. These plans are highly transactional and are making their way into banks and P&C agencies, where life insurance has typically been sold as something of an afterthought.

Myths about the marketplace
The perception that the guaranteed and simplified issue marketplace only exists to serve ‘unhealthy’ clients has given rise to myths about the products and the companies issuing them, thus limiting their use with a wider spectrum of clients.

Myth #1: The products are only designed for the extremely ill
With little or no underwriting, there’s definitely a portion of the market that aims at less healthy clients. However, other products are essentially fully underwritten through a 30-45 minute telephone call by a trained underwriter.

Myth #2: The products are extremely expensive
Although the premiums of Guaranteed Issue plans are well in excess of those of traditional plans, there are some Simplified Issue plans with premiums on a par with traditionally underwritten Standard or Standard Plus rates. The cost of these plans is typically correlated with how many medical questions are asked on the application, i.e., the more questions on the application, the lower the cost of the policy.

Myth #3: Plans are only available in very small face amounts
Although most Guaranteed Issue plans have a maximum face amount of $25,000, there are some simplified issue carriers offering plans up to $350,000 of coverage with no exams or APS ordering.

Myth #4: The plans are not available for clients who have been declined
Although prior declinations are a ‘knock out’ condition for some Simplified Issue carriers, there are others that accept clients who have been declined elsewhere.

Myth #5: Carriers in this marketplace are not financially strong
Many Simplified Issue carriers carry A+ ratings and one of the top five insurance carriers in the US has converted to an Express Issue format for all term applications under $500,000 of coverage.

Myth #6: Only whole life plans are available
There are some guaranteed term plans available that ask only five medical questions. For Express Issue plans, clients can obtain up to $350,000 of term coverage.

Reconsidering the guaranteed issue marketplace
The guaranteed and simplified issue marketplace is a significant and growing portion of the life insurance industry and one that many agents continue to ignore. A recent New York Times article stated that fewer Americans are insured than ever before. It pointed out that most insurance agents avoid the lower- and middle-market segments, focusing their attention on the higher premium cases found in the more affluent marketplace. In effect, it isn’t worthwhile to spend time and effort on small cases.

Simplified and Express Issue plans could be a way to do business in this underserviced market since they minimize both the agent’s and the consumer’s time commitment. The greatest delay in the regular insurance process involves exam scheduling and ordering of medical records, both of which are eliminated with Simplified Issue plans.

To make it easier for agents, some carriers have combined the three types of plans into one ‘cascading’ application with the medical questions for each plan. The more questions the client can answer ‘no’ to, the better the plans they qualify for. As clients qualify for each plan by answering ‘no’ to the questions in a particular section, they can move on to the next best plan. Therefore, the agent determines the best plan the client can qualify for at the time of the application, so the client pays the lowest premium possible.

Although Guaranteed and Simplified issue plans are not the ideal solution for every client, there is definitely a market for them, since they can address a number of issues that exist with traditional insurance for both the client and agent.

by Josh O’Gara, CLU
Mr. O’Gara is affiliated with First American Insurance Underwriters, Inc., Needham, Ma. 

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