Life insurance: On the edge

Howard Ublansky had no idea how much the simple task of taking out an insurance policy would change his life. In 2002, the 37-year-old owner of a book distribution company purchased a house in Thornhill, Ont., north of Toronto. As the family’s main breadwinner, he applied for $500,000 in mortgage life insurance to protect his wife and three young children if anything should happen to him. In keeping with the standard insurance process, he underwent a medical exam and provided some blood samples. No problem—until Ublansky received a letter from the insurance company denying him coverage. It turned out he had diabetes. “I had no idea,” he says. “My wife was very upset. She was saying, ‘What am I going to do if you die? I’m going to be out on the street.'”

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Paul Knapp got a similar shock early in 2007. The 41-year-old wanted half a million dollars in life insurance to supplement the group coverage he gets through his employer, a downtown Toronto law firm. Knapp has an 11-year-old daughter who has lifelong special needs. “I wanted to make sure that there were funds available in the future should I not be on the scene anymore,” he says. But Knapp flies planes for a hobby. “That had a dramatic effect on the premiums,” he says. His quotes were at least double the standard rates, and one was almost triple. Knapp was left debating whether he was willing to give up the flying hobby he loved to get the insurance he needed.

Such situations are more common than you may realize. About one in 10 people who apply for life insurance are deemed to be higher than normal risk because of a medical condition or lifestyle choice. What can you do if you find yourself like Ublansky and Knapp, being declined for coverage or quoted rates you can’t afford?

It helps to learn how life insurance works. Unlike property insurers, who can always raise your rates after you file a claim or two, life insurers are locked into whatever rate they quote you when you take out a policy. If you develop cancer six months after signing up for a 20-year term policy, your premiums for the rest of the term don’t go up after the diagnosis. The insurer is on the hook and thus the insurer tends to be very cautious when you first apply for a policy.

Life insurers begin by asking your age, your sex, and whether or not you smoke. They use this information as a first step to determining whether you qualify for standard insurance rates. You can do this yourself at websites such as Kanetix.com or Insurance Direct Canada. If you’re a 42-year-old female non-smoker who wants a 20-year term policy for $500,000, you’ll find that your standard rate is approximately $60 a month. If you smoke, you can double that.

To actually get a policy, you will have to answer many more questions about your health, your family medical history, your use of alcohol and tobacco, your financial status and any dangerous activities you’re involved in. For large policies, the insurance company will require a medical exam, including a blood test. An underwriter will then decide whether to offer you the standard rate. In 60% of cases, that’s exactly what the underwriter does. If you are exceptionally healthy and have no family history of serious illness, you may even qualify for preferred rates, which are lower than standard. That happens in about 30% of cases.

But not all people are so lucky. If the underwriter feels you’re more likely to die than others of your age and sex, you’ll either be denied coverage (this happens in about 3% to 6% of cases), or you’ll get a rating that leads to higher premiums. These are expressed as a percentage: if you get a 50% rating, you’ll pay 50% more than the standard rate, while a 100% rating means your premiums will double. Usually the ratings are from 50% to 400% more than standard, says Lorne Marr, an independent broker in Markham, Ont. In other words, being labelled high risk can lead to premiums four or five times higher than standard sometimes even more.

Life insurers consider many factors before slapping a rating on you. Smoking is the biggest single risk factor, though alcohol is important as well. “If you drink three glasses of wine a day, as opposed to one, you might pay an extra premium,” says Marr. “If you’re an alcoholic, you won’t get coverage at all. If you’re a recovering alcoholic, you should be able to qualify at the standard rate after a certain amount of time, usually in three to five years.”
As Knapp discovered, recreational activities such as flying, skydiving, scuba diving and rock climbing can also make you a high-risk case. Whether this results in a rating depends on your level of involvement, how many hours you fly or where you do your climbing, for instance.

With medical conditions, it’s not as simple as saying high blood pressure equals a rating of so many percentage points. “œVery few conditions are cut and dried,” says Brian Baxter, chief underwriter at Wawanesa Life in Winnipeg and chair of the Canadian Institute of Underwriters. While recently diagnosed cancer or heart disease results in automatic declines, other conditions, including diabetes, obesity, high blood pressure and high cholesterol, can result in a rating, but the ultimate effect depends on the severity of the condition. Ublansky was turned down for insurance because his blood sugar was three times normal, he was overweight and didn’t even know he had diabetes. However, a person within the normal weight range who can demonstrate that his condition is under control may receive no rating at all. “I’ve had all kinds of people with high blood pressure approved at standard rates,” Marr says.

Family history matters less than you may think. If one of your parents or a sibling died from cancer or heart disease, you will not get rated. (A few conditions, however, will set off the alarm bells. For instance, if you have immediate family members with Huntington’s disease, which has a very high hereditary component, you will likely be rated or declined coverage.) Your occupation isn’t usually a big factor either, even police officers and firefighters get standard rates, for example. The few jobs that may require higher premiums include bomb defuser, deep-sea diver and race car driver.

If you’re denied coverage or slapped with a rating, you may be tempted to go to another insurance broker or company and try again, this time leaving some choice information off the questionnaire. This strategy, alas, isn’t going to work. When you fill out an application, your signature authorizes the company to send your information to the Medical Information Bureau (MIB), whose membership includes hundreds of North American insurers. The insurance industry would rather you not know about MIB, but here’s how it works: if an underwriter discovers something worrisome in your questionnaire or medical exam results, he or she adds an alphanumeric code to your MIB file. This code might translate to “applicant’s doctor reported diabetes in 2006,” or “lab tests indicated cocaine use in 2005.”

If you apply for coverage with another company in the future, your underwriter can access this information, the same way your bank checks a credit bureau’s file when you apply for a loan. Your MIB file does not include the name of the company you applied with in the past, nor does it indicate whether you were declined or rated, although since it contains only red flags, the implication is obvious. An insurer is not permitted to decline or rate you based solely on information from MIB, but if something untoward turns up, the insurer will ask more questions and perhaps order more tests. (You can obtain a free copy of your MIB file by calling 1-866-692-6901 or visiting www.mib.com/html/request_your_record.html.)

So what should you do if you have been turned down or quoted exorbitant rates? You have several options:

Find an independent broker. Some insurance companies employ agents who sell only that firm’s products, but high-risk applicants are better off finding an independent broker. Each insurer has its own underwriting protocols, and an experienced broker will have a feel for which insurance company is likely to offer the most favorable rating to a client with a particular risk factor. Ask your broker to submit applications to two or three carriers at the same time to stir up competition. Going this route does not mean that you will have to endure two or three medical exams: the broker can help arrange a single examination, and the competing insurance companies will split the cost.

Get your health condition under control. Ublansky’s story has a happy ending. After getting declined, he devoted himself to improving his health. A self-described former couch potato, Ublansky went for nutritional counseling, started exercising and lost 35 kg in about a year. He took medication and watched his blood sugar levels drop back to normal. Then, with the help of Marr, the insurance broker, he pulled together all the medical documentation and reapplied. Not only was he approved for a whole-life policy worth $1.5 million, he’s paying standard rates.

Ask for a temporary rating. If you are quoted higher premiums because of a medical condition that may improve in the coming years, ask whether the insurer will agree to a temporary rating, sometimes called a “flat extra.” For example, if you were successfully treated for cancer, but the insurance company is concerned about it recurring, they may agree to charge a higher premium only for a specified number of years. “There are forms of cancer that are treated quite well today, and if the person is free of it for five to 10 years, they may well qualify at standard rates after that,” Baxter explains.

Accept the higher premium, for now. “I often recommend that if you get rated, take the policy, even if it’s for only a few months,” says Marr. “That becomes your worst-case scenario. A good example is diabetes: you may get rated at 75% or 100%, and if it improves, then we can apply to get that rating removed. But let’s say you don’t take the policy and then suddenly develop kidney problems. Diabetes plus kidney problems equals a decline.”

Seek an exclusion. If your high-risk rating stems from a dangerous avocation, you can opt for a waiver, or exclusion, that releases the insurer from paying a benefit if you die while engaged in that activity. That’s the option Knapp settled on: he now pays standard rates, but if he were to die while piloting a plane, his beneficiaries would receive nothing. For Knapp it was a relatively easy decision, since he flies far less today than he once did. “If I was still going to be doing a lot of flying, I would have been more concerned.”

Consider a guaranteed issue policy. We’ve all seen the commercials with the grinning seniors who just got life insurance with no medical exam. These ads are for “guaranteed issue policies,” which are available to anyone and require you only to fill out a brief questionnaire. Of course, there is a catch. The coverage is rarely more than $25,000, the policies usually don’t pay if you die within two years, and the premiums are sky high: for a 40-year-old male non-smoker, a paltry $25,000 policy costs about $56 a month. For that amount, a person of the same age who qualified at standard rates could buy a 20-year term policy with more than 15 times the coverage. “These policies are a last resort,” says Marr. But if you truly need insurance, they may be your only choice.