New Policies for the 'Uninsurable'

By Sam Radin


When it comes to estate-tax planning, the health of a family business need not be tied to the health of the business owner. Often, the preferred way to fund those estate taxes, which start at 18 percent and rise quickly to 55 percent, is to buy a life insurance policy for the business owner. Life insurance is usually cheaper than other options, such as using personal assets, earnings from the business, or a bank loan. But what if the business owner is a lousy risk?

Like beauty, insurability is in the eye of the beholder. In fact, health problems that once made a person uninsurable frequently do not prevent coverage today. Even many good insurance professionals are not aware that there are several classes of insurability, and that business owners in less than perfect health may qualify for large amounts of life insurance under special circumstances.

One new type of policy was created after Congress revised the estate-tax laws in 1981 to permit an unlimited deferral of estate taxes until the "second to die" of a husband and wife. Because estate taxes do not have to be paid until the second spouse dies, the family does not need money from insurance until then. The new type of policy insures both spouses and pays no benefit until the second's death. The premiums for these policies are much cheaper than those for traditional policies because the insurance companies do not pay for the first death and thus minimize their risk.

In simple terms, if the cost of insuring a man of a particular age is $10,000 per year, and the cost of insuring a woman of the same age is $7,500 per year, the cost of insuring both of them with one policy might be in the range of $5,000 per year, or less. This lower cost offers an enormous opportunity for the health-impaired business owner with a healthy spouse. Even if a substantial extra charge were imposed, the cost of insuring both the uninsurable and the healthy spouse should be less than the cost of insuring the healthy spouse alone.

The insurance industry is trying to gauge and set standards for the life expectancy of the so-called uninsurable. This is a highly subjective process, still in its infancy.

Much, of course, depends upon the facts and circumstances of each case. Some companies have for several years been offering policies to couples with one spouse who is uninsurable on his or her own. Other companies have assigned the uninsurable an "age rating," adding perhaps 20 years to that individual's age for the purposes of determining the risk (and cost). For instance, because most insurance policies anticipate death at about age 95, a 65 year-old who is age-rated to age 85 is deemed to have a considerably shorter life expectancy. Some of the health impairments that have led to the "uninsurable" designation have been forms of cancer, heart disease (including bypass surgery), history of stroke, and other major medical problems. The theory is that if there is a healthy spouse, the addition of the second insured, even if uninsurable, reduces the mortality risk of the healthy spouse (and thus the insurer's liability) in the early years of the policy.

What if the business owner has no spouse? There are still avenues for obtaining insurance, although in somewhat more limited amounts. One of these is the so-called "guaranteed-issue" policy. This type of policy is usually offered as part of a group insurance plan, frequently in conjunction with a pension or profit-sharing plan. These insurance plans guarantee coverage for everyone in the group, healthy or not, at standard rates. Such coverage, however, is usually restricted to $500,000 or less.

If insurance would help you to fund an estate-tax liability, you can investigate the matter at no cost. The best way to learn whether such insurance is available is to submit copies of the medical histories of both the uninsurable business owner and spouse to an insurance company for preliminary evaluation. Only if the insurance company says it would consider coverage should you make a formal application and have a medical examination.

Insurance companies are even carving out niches by specializing in underwriting policies for people with one or more types of diseases. Some companies are more aggressive in underwriting policies for persons with heart disease than for those who have cancer; others will sell policies to cancer patients before heart patients. Some companies will sell policies to diabetics, and other companies will not.

This is why it is important to first provide the medical history for informal preliminary evaluation. Remember, some companies will insure any uninsurable as long as the other insured is healthy. This means that the uninsurable individual who has had cancer surgery within the last six months can obtain second-to-die insurance with the aid of a healthy spouse. The healthy spouse doesn't have to be perfectly healthy, just healthier than the uninsurable spouse.


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February 1990

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