Have you ever wondered how the lead characters on crime solving TV shows (like CSI) are always able to magically solve cases in a 24-hour period? Highly unlikely right? While their timelines seem a little too good to be true, their consistent approach, which usually includes three steps, seems to work. First they assess the situation and call out the fact or crap! Then they usually do a little more investigation to get to the bottom of the mystery. And last, they uncover the truth. So how does this relate to financial underwriting? Well the three crime-solving steps are quite similar, read on to find out how!
The majority of experience I have gained in my career has been from underwriting Creditor Insurance Products. Since the pricing of these policies are carefully calculated for the purpose of paying off an outstanding credit balance, it gave me limited exposure to understanding Life Insurance as a financial vehicle. This was an aspect of the business that I was not familiar with as it was generally inconsequential to Group Products. As I transitioned to underwriting Life Policies at LOGiQ3, I immediately gained an appreciation and solid perspective on the importance of financial underwriting.
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Traditionally, financial underwriting has helped insurance companies monitor and control the financial aspects of the risks associated with life insurance. Most importantly, the purpose of insurance and its design is to protect against unexpected loss. Often the applicant will designate a beneficiary and assign that person a percentage of claim payout in case of a premature death claim.
Part of shifting my focus from Group to Life products included being exposed to a copious amount of Life applications. This combined with the fundamentals of financial underwriting online course I took, helped me get a better understanding of life policies. There were three key concepts that I think are key to financial underwriting – I break them down below following the three step CSI methodology.
1. Insurable Interest vs. Insurable Need [fact or crap]
The beneficiary should always have an insurable interest on the life being insured. This insurable interest should be weighed against insurable need. The relationship between the insured and the beneficiary is one of the most important aspects of financial underwriting. The key is to determine who the beneficiary is, and what loss the beneficiary would suffer if the insured were to die unexpectedly.
Insurable need is the actual monetary amount that is required to replace the contribution made by the insured to the household or business. Essentially, this is how much money is required to ensure that the beneficiary, household or business maintains a consistent and sufficient compensation following the death of the Insured.
Insurable interest exists when there is a common interest in another person continuing to live, or if a financial loss would result in the event of that person’s death. Inherently, it’s based on who needs the money and why. For example, if the bread winner (parent) of a household were to unexpectedly die, the insurance would mitigate the risk of loss for the children and household.
2. Purpose of Insurance [a little more investigation]
When reviewing an application for financial validity, one must ask if the amount of coverage requested makes sense, or is justified. We also ask what the purpose of the insurance is. If there is any ambiguity in answering these questions, there is an increased chance for the insured to replace the policy early on, as well as poor persistency (early lapse), and non-payment of premiums. Because of this, the purpose of the insurance must always be stated. In the event that a policy is replaced early, or should experience an early lapse, the company will often not be remunerated for the cost of the acquisition from collected premiums. These may include costs associated with age and amount requirements, underwriting and processing fees.
3. Anti-Selection [uncover the truth]
Anti-selection is another reason why we financially underwrite Life policies. This is when an individual with a significant potential to file a claim is trying to obtain insurance, and withholds information from that company. This can be a misrepresentation of medical, non-medical or financial information. To prevent fraudulent claims, the amount insured must not exceed the amount required. As such, income replacement guidelines are often used to calculate the needs of the insured and to justify the face amount. The application is the primary source for obtaining this information. An inspection report may also be available to provide evidence to support the statements made on the application. This usually includes a confirmation of the employer, annual income, history of bankruptcy, in-force coverage, and net worth. The agent’s cover letter, financial statements, or tax returns may additionally provide insight to the purpose of the insurance.
The financial underwriting mystery has been solved! Well, not quite… In addition to Group products such as Mortgage Protection, there are a variety of other reasons why an individual may obtain personal Life insurance. Some of these include income replacement, charitable giving, final expenses, and capital gains. Since there are several reasons, it is important to understand the need of the insurance, the purpose of the coverage, and if the premiums are affordable to the client. As an applicant ages, their needs and amounts of insurance coverage may also change. Furthermore, given the variety of products available including children’s insurance and business insurance, exposure to these policies would inevitably hone one’s skills in financial underwriting.