INSURANCE
Adventures in Life Insurance: Protecting Those Who Protect Us
By Andrea Clark with Jeremy Vidmar
There is one point of agreement about acquiring life insurance—there is not a lot to like. If you can get over the hurdles of salespeople, case design, and premiums to be paid, you still have the dreaded experience of health and personal underwriting. This is never more apparent than when you have clients in the military or who have other high-risk occupations or personal hobbies.
As one of the founding members of the Military Financial Advisors Association, our firm works every day with military and veteran households. Service members and veterans have unique payments and benefits to consider in their holistic financial planning, and usually these differences are an advantage to planning. The downside can be insuring the risks that come with that lifestyle, both during active service and when they make the transition from military to civilian life.
Where Do I Start?
The best place to start with any of these situations is finding the right insurance company. Since those of us in the Fee-Only space do not carry an insurance license, it puts a premium on having trustworthy referral sources. Luckily for us, there are many more out there these days who have a fiduciary mindset and will take the time to treat our clients the way we want them to be treated.
We often find our clients who are underinsured staring down the same question about where to get started. Some want a quick and easy application process without endless calls and emails from multiple companies, while others want more personal attention to help them stay on track with acquiring insurance. Our firm has referrals that run the whole gamut of these options to help remove the friction for our clients in addressing this important part of their overall financial plan. The NAPFA Community Forum, available to members, is a great place to ask for and share these referrals.
However, just getting the ball rolling is not the last hurdle. Nothing undermines finding affordable and appropriate insurance more than a letter saying, “We are sorry to inform you that we cannot offer you insurance at this time.” Jeremy Vidmar, regional vice president of E4 Insurance Services, says, “You are better off to get to that answer before you get too far into the process. Informal underwriting asks the health and personal questions of the client before handing it over to the insurance company for a decision with a signed formal application.”
What Is Informal Underwriting?
Informal underwriting, or prequalification, has become more of the norm in the industry. This type of underwriting is usually handled through a brokerage firm that has access to numerous companies where they can submit the case. Vidmar says, “Speaking from personal experience, the company that I work with also has direct access to a reinsurance company for very difficult cases.” The client’s name is typically left off the underwriting file. So even if there is an informal decline, it is not a formal decision from the company that must be disclosed on future applications.
This informal process is especially helpful for clients who have high-risk occupations or a history of health issues, both physical and mental. Nowhere is that more prevalent than in our firm’s niche of serving the military and veteran community. The negative effect of being declined on a life insurance application is not something we all learned about in our FINRA series test or taking the CFP® exam. Vidmar says before he entered the financial services industry, he had little awareness of the consequences of a decline. “I soon realized that a decline is reported to the Medical Information Bureau (MIB),” he says, “an organization that holds the info (according to HIPAA standards) to help reduce fraud in insurance applications.” But it can also make it difficult if your client has ever received a decline for reasons that may have changed since that declined application—just another reason why informal underwriting for any questionable clients is a solid plan.
What About Veterans?
While a service member has many valuable benefits for themselves and their survivors should they be injured or killed in the line of duty, the rules of the game change dramatically as they transition from military service to veteran status. For example:
- Many career fields within the military are considered high risk and leave the servicemember with no option for additional life insurance beyond the $500,000 offered by the military. While it is affordable, it is not typically enough for a young, growing family.
- Servicemember Group Life Insurance (SGLI) ends with military service, just like other employer-offered insurance plans. While it can be picked up again immediately as a veteran, it becomes increasingly expensive with age (annual renewable term).
- Service members are more apt to fly recreational aircraft, scuba dive, rock climb, and participate in other “adventurous” behaviors that make them just that much harder to insure.
- Insurance companies will only allow application, exam/labs, and policy delivery to be completed while an individual is on U.S. soil. A service member serving outside the U.S. will find limited or no options during those years overseas. This is also troublesome for employed spouses who might change jobs and lose employer-provided life insurance coverage in the process. For service members retiring from an overseas assignment, this is a priority item on their transition checklist that cannot be addressed.
- Those in medical fields such as doctors and dentists also need disability coverage while they are still young but they struggle to find it due to their current military service.
- Service members go through the VA’s disability determination process upon leaving the military, which can sometimes involve rounds of medical appointments. The addition of these new medical records and notes to an individual’s history can lead to difficulty for some in getting life insurance coverage after service.
- If the veteran has earned a military pension, there is the need to fully protect that income based on the service member’s lifetime. While the military offers an inflation-adjusted Survivor Benefit Plan (SBP), it only covers 55% of the pension. Plus, many veteran households have those additional tax-free monthly VA disability payments that can be up to $50,000/year.
For all of these reasons and more, our clients present us unique insurance challenges. We always recommend they find out if they are insurable at an affordable price before they separate from service, giving themselves plenty of time to put adequate protection in place for themselves and their loved ones. Vidmar recommends starting the process a year prior to military retirement, and our firm has found some cases can take that long to make their way through the whole informal and formal underwriting processes.
The Takeaway
While not many of us love insurance, we do love what it does and that we have more choices for protecting the harder-to-insure folks who protect us. We hope we never have to help a client or a client’s beneficiary file a claim but if we do, we will be glad we recommended insurance be put in place and went the extra mile to make it happen.
Andrea Clark, CFP®, AFC®, is the owner and founder of The Table Financial Planning, an independent RIA serving clients virtually across the country and around the world.
Jeremy Vidmar, FIC®, CLTC, is a regional vice president with E4 Insurance Services who has a focus in helping Fee-Only advisors looking for insurance protection for their clients.
image credit: istock.com/ilkercelik