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Simplified Issue Life Insurance

Underwriting for Life Insurance - Simplified Issue vs. Fully Underwritten

Life insurance comes in two categories when it comes to underwriting, simplified issue and fully underwritten. When you are meeting with clients as an agent, or looking for life insurance as a customer, it’s important to be knowledgable about this, because it will ultimately determine the application process, the premium, and the amount of coverage you receive. 

When someone goes through the examination process for a fully underwritten product, that information is added to the MIB. Not the Men In Black. Much less fun or cool. 

The MIB is the Medical Information Bureau, and it is where insurance companies share data about customers with each other. It’s like a credit bureau for life insurance. So yes, going fully underwritten can have lasting consequences, but let’s talk about when it will be appropriate, also. First off, though, a background about what underwriting is.

What is Underwriting

As a life insurance agent, when I think of underwriters, I think of gollums in a cave, hair falling out from all the stress. Pale skin that is oily, staring at their computer screens and the Insurer’s general account muttering “my precious” under their breath. 
 
Groups of gollums meeting together before everyday sharing about the way they rejected potential clients, clapping and laughing. Then one suggests accepting someone for coverage and the smiling and laughing stops. “BUT WHAT ABOUT MY PRECIOUS” the other gollums yell at the gollum suggesting coverage. Is this a realistic view of the underwriting process? Probably.
 
As an insurance customer, you should consider that the underwriters exist in order to make sure that the the insurance company makes money. In today’s low interest rate environment, it can be tough for the investments in the general account to make much of a profit without taking on too much risk. 
 
More and more, insurance companies are arbitrarily turning customers down. As an insurance customer, it’s important to consider that giving more information to the insurance company may result in a WORSE rate. Not only at the insurance company that you applied to, but also at other insurance companies. This is because of the MIB, which is a little bit like a credit report for life insurance companies. Fully underwritten products are necessary in some cases though, so let’s talk more about exactly what they are.

What Are Fully Underwritten Products?

Fully underwritten life insurance products are often-times a lengthy drawn out process. It’s the type of insurance where they send a nurse to collect urine, blood pressure, heart rate, and dig into your health records. It can take anywhere from 6 weeks to 6 months. After all that time, they may then deny the application, and then that information goes onto your record that they share with other insurance companies!
 
That doesn’t sound fun at all, especially if your afraid of needles. There are also horror stories where healthy people get turned down for funky readings. For instance, I know someone who got turned down because they took pre-workout before they peed in the cup. Other common reasons for denial are high HBA1C (diabetes), being overweight, lipids out of wack (problematic blood-work), blood or protein in the urine, or cancer history in the family. 
 
So it’s important to take a long hard think before you decide to have insurance companies digging into your health, and poking around your medical records. People still do it, though. Let’s talk about why.

When Should I Pursue a Fully Underwritten Product?

All that truth about underwriting behind us, the truth is that fully underwritten products are absolutely necessary sometimes, especially in the case where someone is needing lots of coverage. In some cases, specifically when you want a TON of coverage, you may have no choice but to go fully or partially underwritten.
 
Another reason to go fully underwritten is if you are a penny pincher and are in good health. In some cases you’ll get more coverage for less. The problem is that we don’t know when those cases are.
 
That being said, the process can take anywhere from 6 weeks to 6 months. That is plenty of time for a client, or you as the customer, to get cold feet, and then you won’t receive the coverage that you need. To be completely honest, nobody wants to save for the future. The potential to save a couple dollars a month or year is in most cases outweighed by the probability that it will result in a higher rate or no coverage at all.
 
Now that you know what fully underwritten products are, and when they’re a good option, let’s talk about the other option, simplified issue: what it is first, and then when it’s a better option for you.

What is Simplified Issue?

Simplified issue is quick. Simplified issue is good coverage. A lot of people go with simplified issue, and there’s a reason for that. If you fit some qualifications, often times you’ll get immediately approved, and rarely does it take longer than 48 hours from application to hear back. Another great thing about simplified issue is that you aren’t providing a lot of health information to the insurance company that might come back to bite you in the butt. 
 
Arguably, the best part about simplified issue is that there is no medical exam. Furthermore, applicants with pre-existing medical conditions can be approved for coverage. More often than not, the company will have the underwriting criteria right there in front of you, so you can make an informed decision about what options are available. This leads us to our final point, which is something we’ve already touched on: when simplified issue is the best option.

When Should I Pursue a Simplified Issue Product?

Simplified issue is great because you will in some cases know immediately whether or not you receive coverage. There are some drawbacks to simplified issue, such as limits to the amount of coverage, but often times you can get multiple smaller policies from different companies. It’s better for people who need a policy more quickly, who want to get coverage but they’ve been denied before for a particular condition that they have.  

Final Points

Now that you know more about the distinction between simplified issue and fully underwritten, you can decide which one is better for you. It’s pretty simple. If you don’t have any pre-existing conditions and are healthy as a horse, young, and aren’t in urgent need of a policy, but want a lot of coverage, fully underwritten may be a better option for you. On the other hand, most people will prefer simplified issue, because it’s easier and less intrusive.
Illustrate purpose of life insurance in picture

Why Do People Buy Life Insurance? (Updated 2020)

Life insurance is purchased for three reasons.

  1. Estate Creation: from the moment you are protected by a policy, the people you care about will be provided for if you pass away.
  2. Estate Preservation: when estate or death tax must be paid, a life insurance policy can be a way to ensure that you don’t have to sell assets harder to turn into cash, such as a house.
  3.  Protection: when a primary income earner passes away, a life insurance policy can be built to provide enough money to pay for the surviving families’ living expenses.

All of these reasons for purchasing a life insurance policy have the common theme of providing money to the beneficiary of the policy. That is exactly what a beneficiary is: the person, or people, who receive the benefit. On the other hand, the policy owner is the person who pays the premiums, and the insured is the person who is protecting the beneficiary.

Typically, the policy owner and the insured are the same person, but they don’t have to be. When the insured passes away, the beneficiary typically receives the death benefit, or the amount of the policy, tax free. There are some exemptions to this rule, as is typically the case with tax laws (sigh…).

Types of Life Insurance

There are two types of life insurance, term and whole. Term life insurance provides protection for a specified period of time. Whole life insurance will provide a benefit (as long as the policy holder decides to keep paying the premiums, or other exemptions don’t apply), and can be paid out to the policy holder if he or she lives to a certain age, typically 121.

Whol Life Insurance

Whole life insurance policies can accumulate a cash value, which typically amounts to the amount paid in excess of the cost of the insurance and the fees. Also, the amount paid is put in an account and gains interest.

Because life insurance premiums are paid with after tax dollars, the amount of premiums paid is not taxable, but the interest can be. It is typically not taxable if paid to the beneficiary upon death of the policy holder, but if the cash value is withdrawn it may be. It also grows tax deferred in the insurance companies “general account”.

Sometimes, the policy owner will take a loan against the death benefit (usually not exceeding the cash value), which would mean that, although they would pay interest on the loan amount, they would not have to pay taxes on the interest upon receiving the money. If you do purchase a policy, all of the specifics will be explained to you so that you understand.

Indexed Life Insurance Policies

A newer option for life insurance is to index the amount paid to the stock market. The cool thing about these sorts of policies is that, although you can gain when the stock market goes up, you are protected if the stock market goes down.

This may be a good option because the economy has historically gone through economic cycles of expansion and contraction, where the stock market goes up and then it goes down. An example of a contraction would be the Great Recession of 2008. The average length of an economic expansion is 58 months, or just under five years. The United States is currently in the longest expansion in history.

If history is to repeat itself, as it usually does, we could be due for an economic contraction, or recession soon. This means it may be a good time to use an indexed financial product such as an indexed annuity of indexed whole life insurance policy.

The Bottom Line

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