My Underwriting Status is Substandard. Is IBC Still a Good Idea?
Full perspective on an unexpected underwriting decision
Thanks to Kaye Lynn Peterson for help proofreading.
You’ve done your homework. You’ve read Nelson’s book Becoming Your Own Banker. You see that your income is currently deposited into a bank owned by others — who receive dividends from the firm performing the banking function. You’ve decided that you might as well be the one to benefit from the function of capital accumulation and deployment. You found an agent through the Nelson Nash Institute Practitioner Finder; you got your questions answered; you decided on a premium funding level; and, you’ve reviewed an illustration (at the right time).
You signed your application and medical release forms. You gave a blood and urine sample. Your agent just contacted you with an update onthe status of your application.
The good news: you’re approved for life insurance. The less-than-good news: the application has been approved with a “substandard rating.”
What does that mean?
In life insurance underwriting, the proposed insured on a particular application for life insurance is assigned an underwriting status. This underwriting status is typically a result of an evaluation of the proposed insured’s medical records, lab results from analysis of the proposed insured’s blood and urine, and the proposed insured’s responses contained in the life insurance application (including the individual’s age and sex). If the proposed insured is sufficiently healthy, the underwriter will approve the proposed application and issue the life insurance policy.
The possible underwriting statuses are, typically, as follows: super preferred, preferred, standard, and substandard. Super preferred status means that the underwriter concluded that the proposed insured is of the best possible health status. This underwriting status is rare. More common is the preferred and the standard statuses. However, substandard happens too. There are also separate designations for those who use tobacco (nicotine, really).
Substandard status usually comes with what are called “table ratings.” A tabled-rated status and a substandard status are the same thing. Substandard (or table-rated) status usually comes with a specific table. They’re alphabetical: table A, B, C, D, E, and F. The further down the alphabet you go, the less favorable the rating.
How do underwriting statuses affect the individual who wants to implement the IBC?
This question requires an analysis of why you’d buy life insurance in the first place.
If you want to do IBC, you likely want to address specific problems. I’ve called those problems, collectively, the costs of dependency on third-party capital. This phrase captures everything the individual who does not own and control capital of their own must pay when dealing with the conventional lending industry. I’ve beat these to death elsewhere on this blog, so I won’t go into them deeply here. Suffice it to say, you see the value of owning and controlling your own capital.
Curiously, the power conferred to an individual in a well-designed dividend-paying whole life insurance policy can cause us to psychologically undervalue the importance of the death benefit. In other words, we underestimate the value of the death benefit in evaluating the (perfectly legitimate) value of the living benefits of well-designed whole life insurance. The point is that while the focus of the IBC is on the cash value, life insurance is still the best (i.e. lowest cost, highest impact) method of transferring capital from one generation to the next in the event that the insured passes away prior to natural mortality. Therefore, you shouldn’t lose sight of the value of the death benefit in your desire to “become your own banker.”
What’s this got to do with someone who is table-rated implementing the IBC?
Typically, someone who wants to the do IBC who later learns that they’re table-rated will be dismayed, because they compare an illustration that takes into account the table-rating (and the attendant higher cost of insurance) to the one they reviewed during the policy design phase. There’s no question, a policy on an individual who is table-rated won’t look “as good” as a policy that insures someone who is rated standard or above. At the end of the day, a substandard insured means a higher risk of early payout to the company. Consequently, the cost of insurance is higher, which causes policy values (like the cash value) to rise slower relative to cumulative premium.
This is a false comparison.
The relevant comparison for a substandard-rated proposed insured is not the policy that assumed standard or above underwriting status. The relevant comparison is life insurance versus no life insurance. In other words, it’s some death benefit versus no death benefit, some progress towards owning the “banking” function versus no progress towards owning the “banking” function.
You cannot control your medical history. The life insurance company cannot control mortality statistics. It’s nothing personal about you that caused the company to offer a policy with a table-rating. In fact, the life insurance company wants your business, the same way that any company wants to serve more customers. As evidence of this, the life insurance company has probably gone to one or more “re-insurance” companies to compare costs and get the best offer to pass on to you.
So, is it worth it to implement the IBC (purchase life insurance) if you’re table-rated?
Absolutely.
Here’re the reasons why.
First, if you’re currently a substandard risk to a life insurance company, the odds that you will become a worse risk, if not totally uninsurable in the future (as you age) is high. It’s not impossible for someone to improve their underwriting status over time, but it is unlikely. So if you’re displeased with how your policy looks now (on the illustration), a policy a few years from now will most likely only look worse.
Second, recall that the relevant comparison (for anyone purchasing life insurance, but especially for a substandard risk), is life insurance or no life insurance. And don’t underestimate the value of the death benefit. Life insurance is the single greatest (most efficient, most cost-effective) method to pass on capital to the next generation. If you’re interested whatsoever in making a positive financial impact on the lives of others after you’re gone, you should be buying life insurance by the truckload. In fact, if you are not currently (say, if you’re single and don’t have kids), but have the foresight to see that you might one day develop an interest in leaving a financial legacy (say, to that future family), then you should still be interested in the best method to do so. Even those who have never heard of the IBC, or have and (wrongly) ignore it, understand this. Therefore, if the choice is life insurance or no life insurance (which it is), and if you have a long-term perspective (which you should), then you should be accepting offers from quality companies for a properly-designed policy.
Third, as a matter of practice, life insurance companies often like to see that an individual who wants to purchase a policy to insure the life of another, owns life insurance insuring himself first. So, if I want to buy a life insurance policy insuring my business partner, the company will likely want to see that I’ve purchased life insurance on my own life first — if I’m able. If you’ve gone through underwriting, and have been offered a substandard-rated life insurance policy, that’s you. This should carry special weight with those who want to buy life insurance in order to implement the IBC. If you expect your income to rise in the future (which it should), then there may come a day where you’ll need to insure other people in your life (in order to expand your “banking” system). Self-insuring (even when table-rated) takes care of this issue before it arises.
Fourth, this varies by company, but table-ratings are usually not set in stone. If your agent gets after it, he can negotiate with the company and request that whatever documentation that led to the table-rating be reevaluated in the near future. Perhaps you had an incident of a particular medical condition that you expect to be ameliorated over the next two years. If that’s the case, you should be sure to see a specialist in the area of concern so that your improve can be properly documented. This information — down the road — can be sent to the underwriter so that the necessity of the table-rating can be reevaluated. It could be the case that your health has improved, the relevant doctor has documented the improvement, and your cost of insurance (and the table-rating) could fall.
By the way, this means you need an agent who is willing to do this, potentially years after he’s earned the bulk of his commission from your business. Of course, something like this is almost never considered by the highly-skeptical individual who chooses his agent solely based on the numbers he sees on an illustration.
Therefore, the idea is to accept the policy as offered (if it’s appropriately designed and offered by a quality company). If your health improves, you can always go back to have the table-rating reevaluated (or at least you should if your agent does that sort of thing). If your health does not improve (which, unfortunately, is the statistically more likely outcome), at least you acquired life insurance while you still could. If, in contrast, you waited and your health did not improve, you may be totally uninsurable.
Fifth, a well-built, dividend-paying whole life insurance policy insuring a substandard-rated individual will still perform well relative to other financial assets. The cash value will still grow much faster than a policy without the specialized design, and you can still become your own banker. In fact, if the cash value is not as high as you’d want it to be, the problem — frankly — is not the health rating; it’s your income-generating ability. A table-rated life insurance applicant-owner can still build substantial cash value early if he has the income to justify the necessary premium. With the proper, long-term outlook, the owner of an “IBC-style” whole life policy will still reap tremendous, purely financial benefits, all on a tax-deferred (accessible, tax-free) basis, in addition to a rising, massive death benefit. Again, the proper comparison is not a policy with a higher-rated risk versus one with a substandard-rated risk. It’s life insurance or no life insurance.
In conclusion, what you need to implement the IBC is an agent who knows what you’re doing and why (and what he is doing and why), a well-run mutual company, and an approved application for life insurance. A substandard rating is just one more feature that is out of your, the company’s, and everyone else’s control. At the end of the day, if you’re thinking long-term; if you’re aware of the cost of dependency on third-party capital; if you want to leave a financial legacy to your heirs — or think that one day you might — in the optimal fashion; if you see a chance for rising income and the attendant need to expand your banking system; and if you recognize the power, strictly on financial grounds, of a well-designed IBC-style policy, then what matters — what does matter — is getting your application for life insurance approved.
With or without the table-rating.
Have a great day!
