Premium Advice — There’s still life after a decline

(April 2008) Very few roadblocks can be as frustrating in our business as a decline. After spending hours of your time developing a relationship, preparing recommendations, and explaining the benefits of purchasing coverage to a client, some unforeseen problem limits the underwriter’s ability to make an offer, and they aren’t able to provide coverage.

How do you salvage this situation? Depending on the product choice and planning solution, you may restructure the existing product, or look at a different kind of product.

Let’s look at five solutions most often used by today’s advisors.

Solution #1 — Joint Last to Die: By far the most common idea for a sample 70-year-old male who has been declined life insurance is to look at a joint last to die, or joint survivor type coverage on both him and his healthy spouse. By only paying out on the second death, the qualification for coverage and the pricing of the premium are more heavily dependent on the healthy spouse. If the planning allows for funds at second death to be paid out and still accomplish your client’s goals, this can be a perfect solution. It most often works in estate planning situations where the estate dollars are needed for taxes owing on the terminal tax return, or for legacy creation to younger generations.

Solution #2 — Intergenerational Insurance What if this same 70-year-old male was looking at life insurance not for estate taxes, but for tax sheltering and asset creation for future generations? What would we do if he didn’t have a spouse to share his underwriting risk with? If he has children or grandchildren who also want to protect their future insurability, he could insure the lives of these children/grandchildren, and own the contract himself for a period of time. The income tax act allows for a tax-free transfer of an insurance contract down generations (includes children and grandchildren). In this case, the client is still creating a legacy asset for his heirs and is able to control their access to the cash value while he’s alive. At some point in the future, he can transfer the ownership of the contract to the child, with no taxation.

Solution #3 — Consider a Different Type of Insurance Consider the reason for the decline. If a client has been denied for depression or disability insurance for back problems, critical illness might be available. Since there is no payout for this condition or the consequences of it, you may still have an opportunity to give the client some valuable protection. If a client is declined for critical illness due to a high probability of diagnosis of a covered condition, consider the lasting effect of the condition. Payout-type products, such as long-term care and disability insurance, don’t necessarily trigger payout purely on diagnosis. An inability to work or perform activities of daily living (ADLs) is needed to qualify for payout. Obviously, these are very different products that cover very different needs, and the client must be aware of these differences. But they offer protection nonetheless.

Solution #4 — Accident-Only Disability for difficult Disability and Long-Term Care cases Though normally thought of as products for blue collar workers, offers can be made on these types of products for workers of all ages and incomes levels. In addition to medically-related declines, clients who might not normally qualify for traditional disability, such as homemakers and seniors, can qualify for accident-only disability. This creates a unique opportunity for clients who never thought they could get a payout-type insurance product due to their lack of income or age. Although these products don’t pay out for the illness-related matters that constitute the majority of traditional disability and long-term care claims (unless you purchase an illness rider), they still provide protection for clients that may otherwise be without any coverage.

Solution #5 — Health Insurance for other Living Benefit declines For declines of long-term care, disability or critical illness coverage, consider basic health insurance. Although it won’t provide true cash flow, it could reimburse for some of the medical costs incurred in the event of a claim. With the unique nature of health insurance being primarily a reimbursement product, it isn’t as prone to the ambiguities in underwriting that impact these other options that pay out lump sums or cash flow. Whereas CI, DI, and LTC tend to pay their claims in a predetermined amount, health insurance pays based on the current needs of a given condition, within specified limits.

Although there are additional strategies to deal with declined cases, these are five of the most common ways of ensuring a client’s chance of disappointment is minimized, and that advisors are compensated for their time.

Chris Paterson is vice-president of sales for Manulife Financial.

(12/03/07)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.