In my last post I brought up the concept of Jumbo Limits which is a term utilized in life insurance underwriting that most consumers and advisors do not have to regularly deal with. Even when they do, this is something the insurance professional deals with behind the scenes and it may never be discussed with the clients.
The concept of Jumbo Limits and the potential repercussions of ignoring them is very important and be can be confusing to people, even agents, who are treading in unfamiliar territory. A common Jumbo Limit is $65,000,000 of life insurance though it can be higher or lower and it is often adjusted by age. This is the limit over which someone who doesn’t know what they are doing can really screw things up. An important issue to remember is that one calculates the limit by taking the currently in-force insurance and adding to it the total amount of insurance applied for with all insurance companies. Remember, even if there is no desire to put all of the insurance applied for in place, the total amount of in-force and applied for coverage is included in the Jumbo Limit calculation.
Consider this situation; we’ll assume a client has “only” $20,000,000 in force and he is working with an agent or a number of agents and he only wants to replace the $20,000,000 he currently has for reasons which are irrelevant at this point. The client has decided competition is good (which it usually is) and has called in multiple agents; an agent with a career shop or captive agency, an independent agent, his financial advisor and maybe even his P&C agent. Remember, whether or not any of the agents are aware the others exist, they are almost certainly not coordinating their efforts with each other and are more apt to be secretive or even combative in their individual efforts to win.
Since there is a desire to have only the $20,000,000 in force ultimately, many people think the Jumbo Limits are a non issue. This is not the case. The career agent might go only to his or her main company but the others might want to submit apps to two, three or more carriers. Very quickly we could have over $100,000,000 “in force and applied for” if there is no coordination.
The client might think he is being clever by pitting the agents against each other but there is more to it than that and there absolutely positively needs to be some coordination and someone in charge or this can quickly turn into a nightmare. Not only should one person be coordinating the process, one insurance carrier should likely be the lead working on behalf of competing insurance carriers, as counter intuitive as it may seem. Diversification can still be achieved, your client can still choose which offers to accept and more than one agent may be involved but there has to be a team captain and the captain should not be one of the agents for obvious reasons.
Seeing that in most situations the agents are likely fighting each other and not coordinating their efforts, we have a few issues. First of all, given the nature of the insurance brokerage market and the agents’ tendency to commoditize the process by spreadsheeting carriers and gravitating to the lowest premiums, some of these agents are going to be submitting applications to the same insurance carriers so there may not be as much diversification as initially assumed. Second, on the applications the agents are unlikely to incorporate the other agents’ efforts, known or unknown, when completing the section on in-force and applied for insurance coverage.
Assuming the $20,000,000 application exceeds the retention limits with the respective carriers, the insurance companies are going to send the files to reinsurers which will cause a logjam when the reinsurer starts getting the case from multiple directions at once. I’m not going to delve into how this gums up the process and how to to fix it. I’ll simply leave it at the fact that you don’t want to go there and it may be difficult to extricate oneself from that morass.
In the end, what seems reasonable from a client’s perspective can shoot him in the foot. You can’t bring in multiple agents on a double blind basis and you can’t allow the agents to submit formal apps with large face amounts. There are ways to informally underwrite a case which won’t screw up the reinsurance market or formal applications can be submitted at death benefit levels which won’t cause problems. Someone needs to understand the playbook and coordinate the players.
Here is one recent story. I was called into a case by an estate planning attorney for clients with an $80,000,000 existing portfolio. The details aren’t important but the entire portfolio was underperforming and in jeopardy. The existing agent took an application for more than $50,000,000 with a single carrier for a single product he was planning on utilizing. There were a number of red flags and a bit of cynicism on the advisor’s part which was why I was called in.
The short story is that there was a better way to create a portfolio in the clients’ interest but because of some underwriting issues, actions of the agent and details particular to this situation, coordinating with reinsurance was off the table for me. Instead, I cobbled together a portfolio with multiple carriers limiting exposure with any given one to their respective retention limits.
In the end, I made it work but it was substantially more difficult than it needed to be and ran up significant advisor fees which were otherwise unnecessary. This case also offered a good lesson in another way. Because of the underwriting challenge with one of the insured individuals, there was no way I wanted the case in the hands of the reinsurers anyway. Once they had an offer on the table, some of the individual carriers would have had to go with it. Rather, I could negotiate with the individual companies with whom I had close relationships and manage favorable offers out of enough of them to build my portfolio in the best interest of the clients. If the reinsurers were running the show, my relationships with the individual insurance companies would have been next to meaningless.
Please remember; when dealing with large face amounts for your high net worth clients, don’t assume the clients’ agent understands the rules of the playing field. An independent quarterback who understands the playbook and can manage and lead each of the respective players is indispensable.