Guides
How insurers underwrite business life insurance
How insurers underwrite key person, buy-sell and other business-owned life policies: financial justification, medical review, risk classes and delays.
Underwriting business life insurance has two halves: whether the insured person is an acceptable health and mortality risk, and whether the amount of coverage is justified by a real financial interest. The medical half resembles personal life underwriting. The financial half is what makes business cases different, and it is where most delays and cutbacks happen.
Who the underwriter is looking at
The underwriter evaluates the insured, not the business, for mortality. A healthy 45-year-old owner of a struggling company is still a good mortality risk. But the business matters for justification. A carrier will not issue a large policy on someone whose loss would not cause a measurable financial loss to the policy owner. That requirement is the insurable interest rule, and carriers add their own financial guidelines on top of state law.
Underwriters usually work from the carrier's own published guidelines, which differ by insurer and change. Treat any multiple or ratio you hear from an agent as that carrier's current practice, not an industry rule.
Financial underwriting by case type
| Case | What the underwriter wants to see |
|---|---|
| key person insurance: protecting the business from a loss of talent | Business financials, an explanation of the person's role in revenue or relationships, the cost to replace them, compensation, the reason for the amount |
| Funding a buy-sell agreement with life insurance after Connelly | Signed or draft buy-sell agreement, valuation method or recent appraisal, ownership percentages |
| Loan collateral | Loan documents or commitment letter, amount and term, the lender's assignment requirement (see SBA loans and the life insurance requirement: when it applies) |
| Executive benefit funding | Plan description for the deferred compensation or corporate-owned life insurance program, compensation, liabilities being funded |
| Executive bonus or split-dollar | Compensation, the arrangement's structure, who owns and pays |
Common financial documents are two to three years of business tax returns, a current profit and loss and balance sheet, and for owners, personal financial statements. The key person insurance calculator and buy-sell agreement funding calculator help prepare the numbers the underwriter will test.
The underwriter checks that the owner and beneficiary on the application match the purpose. A business-owned key person policy has the business as owner and beneficiary. A cross-purchase policy has each owner as owner and beneficiary on the others. Mismatched ownership, for example the insured owning a policy that the business pays for, can create tax issues and questions at underwriting.
Medical underwriting
For policies above carrier thresholds, expect:
- Application. Health history, medications, tobacco and nicotine use, family history, occupation, avocations such as aviation or scuba, foreign travel, driving record and finances.
- Paramedical exam. Height, weight, blood pressure, blood and urine, sometimes an EKG for older ages or larger amounts. Labs may screen for cholesterol, glucose and nicotine.
- Attending physician statements. Records from the insured's physicians when the history calls for them. These take the longest.
- Database checks. Prescription history, motor vehicle reports and the MIB, a membership database in which insurers share certain underwriting information about prior applications.
- Interview. A phone call to clarify answers.
Smaller or simplified-issue policies may skip the exam and rely on the application and database checks, at higher prices or lower limits. Group and guaranteed-issue programs used in broad-based business coverage skip individual underwriting within limits.
The underwriter assigns a rate class: preferred and standard classes, with or without tobacco, or a substandard rating (a table rating that raises the premium, sometimes with a flat extra for avocation or occupational hazards). An offer can also be postponed or declined. Carriers differ on how they treat conditions such as diabetes, sleep apnea, cancer history and mental health, so a decline at one carrier is not a decline everywhere.
Employer-owned policies and consent
If the business owns a policy on an employee, the application and file should show that the employee gave written notice and consent before issuance, as IRC 101(j) requires. Many carriers include a notice-and-consent form in the application package for employer-owned cases and ask the employer to certify compliance. The carrier is not responsible for the employer's compliance, and a form that lacks the dollar amount of coverage does not satisfy the notice requirement. See Employer-owned life insurance: notice and consent rules under IRC 101 and COLI and BOLI explained: corporate and bank-owned life insurance. Insurable interest and consent also depend on state law.
Timeline and what slows it
Underwriting that includes physician statements can take weeks. The usual delays are:
- Missing medical authorizations or an incomplete application.
- Slow responses from physician offices.
- Business financials that do not support the requested amount, which can trigger a request for more documents or a lower offer.
- Ownership and beneficiary details that need correction.
- Large amounts that require reinsurer review.
- Changes in the insured's health or the application answers between exam and issue.
Ask whether the carrier offers temporary coverage pending approval, and read the conditions. Temporary coverage is limited and conditional.
Misstatements and the contestability period
An application is a legal statement. A material misstatement or omission about health or tobacco use can allow the insurer to contest a claim, usually within a period set by state law, commonly two years from issue. The business should not guess at answers or let someone else complete the application for the insured. The insured reviews and signs the application.
Preparing a business case
- Define the purpose in one sentence and match the amount to it.
- Gather the financial documents before applying.
- Complete health disclosures completely and consistently.
- Decide ownership, beneficiary and any lender assignment up front.
- Shop more than one carrier when a health issue is present, using an agent who can work with several insurers. Informal inquiries on a de-identified basis can show where the risk is viewed favorably before a formal application.
- For disability coverage, see key person disability insurance: protecting the business when a leader cannot work, which has its own financial and occupational underwriting.
Hypothetical example
Say a 55-year-old owner of a 30-person engineering firm applies for $3 million of key person coverage, owned by the firm. The firm explains that she holds the license and relationships behind about a third of revenue. The underwriter asks for three years of returns and current financials. The owner has controlled high blood pressure, so the carrier asks for a physician statement. The offer comes back at a standard rate class for $2.5 million, the underwriter's view of the supportable amount. The firm accepts, adds a second carrier's policy later if its revenue grows, and files the employee's written consent before the policy issues. The facts are invented.
Key takeaways
- Business life underwriting combines the usual mortality review with financial justification for the amount and the owner.
- Bring financials, the buy-sell or loan documents and a clear purpose to the application.
- Carriers publish their own guidelines, which differ, so one carrier's limit is not a rule.
- Employer-owned policies need written notice and consent before issue under IRC 101(j).
- Complete answers on the application protect the claim later.