Hedging against uninsurability

When it comes to insurance sales, some clients may be inclined to avoid the “bells and whistles” that are available on their policy, believing they are simply being up-sold. But the benefits of some riders deserve serious consideration, as they can save the client a great deal of aggravation down the road.

Among the most valuable riders are those that ensure the client’s insurability down the road.

“If you need to buy more life insurance, they want underwriting. And quite often when you buy more insurance, it’s at your attained age,” says Matthew Younder, director, insurance services at Richardson GMP.

If a client were to buy an original insurance policy at age 50, but determine that they needed increased coverage 10 years later, they would face fresh underwriting at age 60.

“You have two things working against you: you’re older, so your costs would be higher; and you may have an insurability issue that you didn’t have ten years ago,” Younder says.

Enter the guaranteed insurability option (GIO), which allows the insured to buy additional coverage within a set timeframe — typically 10 years — without undergoing another round of medical underwriting.

Of course, the client cannot simply request this option on a hunch that they might need it.

“With these options, you have to disclose to the insurer why you want that ability to buy more insurance later on,” he says. “You have to be financially underwritten to prove that this applicant is going to have a future liability that isn’t present today.”

“One example would be a business owner who can legitimately demonstrate that their business should be worth more ten years down the road than it is at the time they take out the original policy.

“This flexibility comes at a price, however. Younder says there is often a 2% increase in the cost of the policy, but in many cases it can be well worth it.

“Younder offers the example of two young business partners starting, of all things, a publication for financial advisors. As part of their shareholders’ agreement, they each carry $1 million in life insurance, allowing the survivor to buy out any heirs.

“They know that they will be able to grow their business over the next ten years, and the value will triple. They can demonstrate this to the insurer, and buy the GIO rider. Given that one is a journalist and the other a salesman, they develop a variety of health issues over the ensuing nine years: they work 16 hours a day; gain 40 pounds; and take up smoking.

“Because they bought the GIO, they can increase their insurance coverage within the 10 year window of the rider without undergoing new medical underwriting.

“”Its one of these types of products where everybody likes it, everybody sees the importance of it, but business owners starting out are so strapped for cash, that they often think this is a rider they can’t afford at the moment.”

“”Based on how you’re underwritten, you could see that rider being as a percentage of the cost of insurance, it could be 2%; it could be 5%. All you’re doing is buying the right to buy more insurance at a later date.

“”We also see this happening where there are companies being passed down through different generations,” he says.

“It can be a popular option for people buying insurance on their children — a typical teenager underwrites very cheaply compared to their parents.

“”When they’re 15 or 20, chances are they are pretty healthy, and they could do a lot to themselves and still be considered a standard risk,” Younder says.

“”These kinds of riders usually have a window — it could be 10 years — the insurer could limit when you can exercise these riders, and they’ll certainly limit the amount of insurance that you can buy,” he says. “Insurance companies want to avoid being anti-selective. They don’t want bad risk on their books by having everybody exercise these riders when they become unhealthy.”

“A policyholder who learns they have cancer is likely to exercise their GIO rider in its entirety, making it vital for the carrier to limit the amount of coverage available.

“”It’s amazing how strict the underwriters are in terms of who’s eligible for it,” he says.

“”At the time that you exercise it, you may not have to show medical evidence, but you have to show financial evidence,” Younder says. “You have to prove that the business is worth more. You have to prove the need financially; you just don’t have to prove your health.”

“The GIO rider is not restricted to life policies. Younder sees a potentially greater need for guaranteed insurability on income replacement policies.

“An IT consultant earning $60,000 per annum may buy disability insurance to cover their T4 income. Over the ensuing decade, they could be earning five to ten times what they were earning when they first bought the policy.

“”Everybody buys life insurance, but not as many buy DI. But the odds of a 45 year old claiming on a death benefit, versus a disability benefits are extremely long,” he says. “Having that rider that says as I make more money, I can buy more coverage without medical evidence, is a pretty good idea.”

“On the disability side, these riders are not especially expensive. A young lawyer earning $150,000, who wants the right to double her income replacement from $6,700/month to $13,400/month would pay, according to Younder, an additional $68 per annum on their policy.

“And yet, these riders remain underutilized, Younder says, pointing to a glaring disconnect.

“”People’s mindsets are funny. There are lots of people who will buy a bigger house because they know that over time they will be earning more and will be able to service that debt,” he says. “Yet they take an opposite approach with their insurance coverage. They say ‘well, this is what I’m earning now, so this is all I need’.”