What is the meaning of Life? Philosophers and religious organizations have asked that question and proposed answers for thousands of years. Life’s meaning fuels coffee shop conversations and late-night ramblings.
For better or worse, Life and Health agents don’t need to address the cosmic question. What matters here sounds much more simple – under a given scenario, what does the proposed life insurance policy or annuity consider “life?” The not so simple piece – does your client understand that?
In one of the E and O claims scenarios from Aspen, our underwriter, an agent faced professional liability exposure when a client claimed the distinction between “life” and “life expectancy” was not made clear to her.
Life and ‘life expectancy’ are not the same
The woman transferred an existing life insurance policy into one with a larger death benefit, thinking she would not face more out-of-pocket costs. Based on guaranteed policy assumptions, the new policy required no additional premiums until she turned 84. But – and this is a big one – based on her medical condition the client’s life expectancy was 77 years.
After she turned 75, the woman began receiving notices that her policy would expire in 2 years without additional annual premium payments of $15,500. The agent, in conversations and emails, had described the policy as needing no additional premiums “for life.”
Technical illustrations with the policy showed both guaranteed and non-guaranteed values for this client and spelled out potential future premiums due. But the agent’s language seemed to contradict those risks. For the client, “life” was life. For the agent, “life” was life expectancy.
Make the distinction as clear as possible
As Life and Health Agents know, life expectancy is the single most important factor in setting life insurance premiums. Gender and age are two big variables; among other factors underwriters also look at personal medical history and family medical history. That’s why annual premiums are far lower for a younger, healthy client – insurance companies have longer to spread out their risk.
But is the distinction between life and life expectancy always clear to clients?
It needs to be. Make sure you explain what the policy under consideration uses for life expectancy in this case, specifically. Show the technical illustrations and outline the potential financial risk if the algorithms get it wrong and, as in our case above, the client “outlives” the policy.
Document the conversations and get the client’s initials and/or signature on life expectancy as defined in the policy. When our unhappy client updated her life insurance coverage, she was 61 and the average life expectancy of a woman her age was 84. But underlying medical conditions reduced her life expectancy by 7 years.
She was not average, and life in this case was not life.