What happens when your client receives a flat extra on a life insurance policy?  Most of the time when an insured receives an unfavorable offer, it is in the form of a table rating.  This is a permanent rating on the policy and can cause varying degrees of increases to the original premium.  A flat extra is usually assessed when an insured has had a recent sickness. That sickness is likely to have taken place within a certain time frame that the underwriter deems as still leading to extra risk. 

The issue with a flat extra, especially on a term life insurance policy, is that it increases the premium much more dramatically than a table rating.  It does usually fall off the policy, but that initial premium may cause your client to balk and not take the coverage at all.  On the example attached, a 57 year old male looking for $500,000 of coverage would need to pay $8,120 for 4 years before his premium is decreased to $3,120 for the remaining years of his 20 year term.  This equates to a total premium of $82,414 over the course of those 20 years. The total cost of the flat extra ends up being $20,000.  That can be a tough obstacle to circumvent when trying to convince the client to accept coverage.

With the flat extra being considered, it is now a great time to position permanent life insurance as an alternative. 

In the example attached, using Lincoln’s Wealth Preserve Indexed UL, there are many different options you could look at from a design perspective.  But to keep this simple, I have run two.

Illustrations Overview

  1. The minimum initial premium would have to be $12,774 for the first 4 years.  After that, the the client could choose to pay $4,000 per year (this is flexible and you can look at many different scenarios).  Assuming a 6.27% rate of return this actually keeps the policy going for 28 years.  If the client wanted to be done with coverage in year 20, the surrender value is $66,824 at that point.  This means the client is receiving back 58% of his premiums paid.  And this also leaves the client with the option of continuing coverage, as opposed to having term coverage run out at the end of 20 years. Net premium cost is $48,272 versus $82,414 on the 20 year term!
  1. The second option is to pay the $12,774 for 4 years, and then pay $9,000 from years 5 and beyond.  This would keep the $500,000 inforce for the client’s lifetime @6.27%.  The client now has permanent tax free death benefit protection.  In addition, if he/she qualifies, you could consider adding an LTC rider. The rider would allow for up to 4% of the death benefit to be accessible for long term care needs. 

While I used Lincoln as an example, this approach has also worked with Nationwide’s products. If your client’s term premium is increased due to an unforeseen underwriting offer, don’t overlook taking a different approach. Premium might be more, but the value added could close that gap and get your client to see valuable benefits.