Traditionally, when a person applies for individual life insurance, they would need to go through an extensive underwriting process that lasts several weeks (or months) and may include personal and family health questionnaires, interviews, and/or physical examinations. Though this process was time-consuming and intrusive from the perspective of the person applying for insurance, it was considered a 'necessary evil' in order for the insurance company to feel comfortable issuing the policy on the person’s life. In more recent years, however, insurance carriers have increasingly offered “instant-issue” term life insurance policies, where a decision is made whether or not to issue a policy for a person within minutes of their submitting an application, with no additional underwriting.
Although these policies make it possible to fast-track the insurance application process for some individuals (who might otherwise be stymied by the traditional underwriting process), they aren’t necessarily right for everyone. For instance, because instant-issue policies require insurers to arrive at a decision without knowing the full details of an applicant’s current health or medical situation, they are generally only offered to the healthiest individuals – while those with pre-existing health conditions (who might still be eligible for insurance through the traditional underwriting process) might be declined after applying for an instant-issue policy. Which frustratingly can make it more difficult (or expensive) to subsequently be insured through traditional underwriting, since the fact of having been declined – albeit for an instant-issue policy with higher health standards than traditional underwriting – can create a ‘black mark’ on the individual’s health history.
Consequently, despite the convenience of instant-issue policies, it’s important not to automatically assume that they will always be the right choice for a person looking to apply for life insurance. Instead, it can be better to weigh the potential benefits of instant-issue (which, beyond the speed and convenience of obtaining coverage, can also avoid the scenario of a previously unknown medical issue coming up during underwriting and jeopardizing the person’s ability to obtain coverage) against the potential costs (which can include higher premiums than traditional underwriting, limits on the amount of death benefit available, and inability to convert to permanent insurance).
Financial advisors can play a key role in helping their clients weigh these factors against their own needs, and – in situations where the client just needs to get at least some coverage in place – guiding them towards a decision that will lead to action. Because ultimately, one of the greatest benefits of instant-issue life insurance is that it can make it much more convenient for healthier individuals to obtain life insurance – which could make it well worth the potential higher costs and other risks involved if the convenience of instant-issue is what catalyzes the client to actually get coverage to begin with!
As the life insurance underwriting landscape continues to evolve post-pandemic, individuals increasingly have access to “instant-issue” term insurance options that cut out many of the traditional underwriting requirements and seek to provide a decision just minutes after submitting an application. These offerings can provide tremendous convenience to individuals seeking term life insurance, but there are also some downsides to instant-issue term insurance to be aware of as well.
First, it may be helpful to provide some definitions regarding exactly what “instant-issue” refers to since there is some ambiguity in how terms are used and that can cause confusion. At a really high-level, we can group the underwriting of term insurance products currently on the market into 3 broad buckets:
- Instant-Issue: Nearly instantaneous decision after submitting an application (less than 15 minutes). Will generally rely on an online (or, less commonly, a phone) questionnaire, a Medical Information Bureau (MIB) report (a resource used by underwriters that generally includes information about past insurance applications, medical history), prescription drug history, and motor vehicle reports. Will not require an Attending Physician Statement (APS), physical exam, or fluids. Because the lack of underwriting prevents carriers from assessing the applicant’s likelihood of submitting a claim, sub-standard coverage for those lower than average health is generally not available.
- Accelerated/Non-Med: Accelerated but not instantaneous underwriting (often 2-4 weeks). Reduces time by cutting out requirements for physical exams and fluids, but may still request an APS. In some cases, sub-standard coverage may be offered.
- Traditional: Full medical underwriting (often 4-8 weeks).
Notably, these categories are not locked in stone. Insurance companies can modify their own underwriting policies, and we may see evolution in what is commonly required over time. But for the time being, these 3 categories do a pretty good job of delineating the different paths that someone might choose to go down when purchasing term life insurance.
What makes instant-issue term insurance different from the coverage available in the past is that decisions are made nearly instantaneously. After submitting an application, individuals will often have decisions within minutes, and the entire underwriting process is done.
In order to offer instant-issue coverage at reasonable rates and arrive at a decision within minutes, carriers will not be able to rely on an Attending Physician Statement (APS), medical examination, or lab work. Nonetheless, it is important to note that carriers will generally have access to historical medical information as well as medical information that an applicant consents to share going forward, which could cause issues for applicants that are dishonest when applying for coverage.
For instance, if John states he weighs 150 pounds when applying for coverage but needs to go to the emergency room a month later and weighs in at 250 pounds, this misrepresentation of his weight could give the carrier strong grounds to contest the policy, void the contract, and refund premiums.
One source of significant confusion within the existing marketplace is the difference between “instant-issue” underwriting and “accelerated” underwriting. Accelerated underwriting is very similar to traditional underwriting, with the exception that there may just be no physical exam required. However, more time-intensive methods (relative to those involved in instant-issue policies) for collecting information, such as attending physician statements, reviewing public records, and even reviewing social media activity, will require more time than can allow for a nearly instantaneous decision.
While avoiding the need for a physical may be a nice benefit of accelerated underwriting, there’s still a considerable convenience factor associated with choosing instant-issue underwriting. With instant-issue coverage, clients could leave their advisor’s office with coverage secured during the meeting, whereas with accelerated underwriting, there could still be up to a 4-week wait for a decision, follow-up questions from an underwriter, and an unfavorable underwriting outcome that would result in the need to start the process over with another carrier.
Of course, unfavorable outcomes can come from instant-issue underwriting as well, but at least in those cases, that decision comes quickly, sometimes within minutes, allowing individuals to move on to their next strategy for securing coverage.
The Importance Of Pre-Screening For Instant-Issue Term Life Insurance
Pre-screening is important for all types of life insurance coverage, and since instant-issue underwriting is generally the most strict in terms of who coverage is offered to, it is especially important to ensure that instant-issue coverage will be a good fit for a client before moving forward with an application.
It may be advantageous to not have to disclose a denial and to not have a number of recent applications show up on an individual’s MIB report, so if it could have been determined in advance that someone would fail to meet a company’s requirements for instant-issue coverage, then this due diligence should be carried out to avoid that outcome.
In the current marketplace, sub-standard coverage is generally not offered via instant-issue underwriting because, without going through more extensive underwriting, an insurance company may have difficulty assessing the degree of mortality risk one or more risk factors may present. As a result, anyone who would be estimated to be a sub-standard risk should likely proceed directly to a traditionally underwritten product, ideally with some knowledge of which carriers might be most open to providing coverage specific to their situation.
Carriers will provide details about requirements that need to be met regarding instant-issue coverage. For instance, some carriers may have limits such as $2 million for instant-issue coverage and a total of no more than $5 million in total life insurance for an individual applying for instant-issue coverage (note: these are just sample numbers). In this case, it would be foolish to approach these carriers and apply for $3 million of instant-issue coverage or for any coverage for someone who already has $5 million or more of coverage in force. Notably, similar limitations can apply to accelerated and traditional underwriting, which are always good to be mindful of when considering insurance products.
Similarly, if a given carrier won’t issue instant-issue coverage for an insured with a standard tobacco rating, then it wouldn’t be wise to apply for instant-issue coverage for an insured that is estimated to have a standard tobacco rating. Furthermore, it is worth noting that the risk of denial is higher for anyone projecting at the cutoff point for a given type of coverage. In other words, the chances of denial for someone projected to be a standard non-tobacco rating are greater than for someone projected to be a preferred plus non-tobacco rating. In the latter case, even if their rating does come in lower than expected, they’re likely to still be offered preferred non-tobacco rather than rejected altogether.
Finally, it is worth noting that some carriers may choose to move someone from an instant-issue or accelerated underwriting track to traditional underwriting solely as a matter of randomly assessing their own underwriting procedures and applicant pool.
From a practical perspective, instant-issue underwriting is likely to look most attractive for individuals with good personal and family health histories. The more that might need to be explained on someone’s application or the more risk factors that are generally present, the more likely someone may be to get rejected for instant-issue coverage and need to pursue traditional underwriting. A proper application pre-screening—health questionnaire, review of family health history, etc.--can provide a significantly better client experience by avoiding applications that are unlikely to be successful in the first place.
The Pros And Cons Of Instant-Issue Coverage
As with any product or service offering convenience, there are also costs associated with that convenience to consider. For example, some of the pros of instant-issue life insurance are that the process of obtaining it is very fast and convenient, behavioral barriers are less likely to be an issue given that there are no underwriting requirements, and the application process is much simpler than that for other forms of coverage.
The cons of instant-issue term insurance include the tendency to be more expensive (with premiums often 10% to 20% higher) than traditionally underwritten policies, with stricter provisions for who will be offered coverage. And if the application is rejected, a denial would also need to be disclosed upon applying for coverage with another carrier. While the application process does not include a physical exam, the absence of a physical also makes it easier for a life insurance company to contest a policy. Furthermore, instant-issue policies usually provide a limited death benefit and are generally not convertible.
The Pros of Instant-Issue Coverage
The obvious pros of instant-issue coverage are the speed and convenience of getting coverage. Depending on how fast someone can get through the insurance questionnaires, it could take as little as 15–30 minutes to have approved coverage in place.
In the context of advisors working with clients – and particularly those working with accumulators (in a project-based or hourly context) or less affluent clientele (that are met with less frequently) – this benefit should not be understated. Instant-issue coverage opens the door to sitting down with clients and having coverage approved by the end of the meeting. Many carriers will also require that EFT payment information be provided as part of the application, so even the monthly payment can also be set up on the spot and ready to go by the end of the meeting.
Anyone who has struggled with getting clients to actually implement life insurance may appreciate how big of a benefit this can be.
Anecdotally, I’ve personally worked with (generally non-ongoing) clients who started the insurance process but never saw it through. Coordinating insurance company phone interviews, scheduling medical exams, changing one’s mind about coverage over a 1- to 2-month waiting period, dissatisfaction with underwriting results, and unwillingness to restart the underwriting process have all been barriers I’ve personally seen to implementing term life insurance.
Furthermore, even for ongoing clients, I’ve had clients that, despite my constant pestering, took years to implement coverage. Based on a combination of these factors, I ultimately decided to drop my fee-only status and add insurance implementation as a service for my clients. I personally felt that I was not fulfilling my fiduciary duty to clients by introducing barriers to implementing term life insurance. Being able to provide that service for my clients has reduced one set of barriers, and the ability to offer instant-issue coverage has removed yet another set of barriers.
Another benefit of instant-issue coverage is that it reduces the risk of something unknown to the prospective insured showing up during underwriting, which can be more likely to happen with comprehensive underwriting processes such as those required by traditional policies. Granted, there’s certainly some health benefit for an applicant to learn about an unknown condition during underwriting, but it is not uncommon for someone to learn something about themselves during the underwriting process that could make their coverage much more expensive, or even prevent them from ever getting coverage.
With instant-issue coverage, though, an applicant only answers questions about their health that need to be truthful as of the time they are answering them. If a client doesn’t know they’ve recently developed a kidney disorder, then that’s not something they are going to disclose and it’s not something that will be revealed through labs as it would with traditional underwriting.
Of course, getting regular checkups so that someone would still learn this sooner rather than later is always advisable, but there are cases where applying for instant-issue coverage may allow someone to get coverage who wouldn’t have qualified for any coverage at all with traditional underwriting.
Furthermore, even if someone remains insurable after a disorder is detected, pursuing instant-issue coverage could still reduce costs if they were to be rated differently after underwriting. For instance, someone applying for instant-issue coverage might qualify for a preferred-plus rating based on what they know about themselves at the time of completing their questionnaire, but only be approved for preferred or standard coverage if they had gone through full traditional underwriting and something new was discovered.
To give a concrete example of this, I recently had a client obtain instant-issue coverage at $126/month with a preferred, non-tobacco rating. Later, he decided he wanted to apply for traditionally underwritten coverage, which had the potential to reduce his premium to $112/month, assuming that underwriting would maintain his preferred, non-tobacco rating. Unfortunately, his lab results dropped his rating from preferred to standard ($173/month), so now he has decided that he wants to keep his instant-issue coverage in place. Had he gone straight for the traditionally underwritten coverage, it would have ended up costing him significantly more.
The Cons of Instant-Issue Coverage
Of course, there are downsides to instant-issue coverage as well. One of the most obvious downsides is the cost. While pricing can vary between carriers and for different amounts at different rating classes, with instant-issue coverage, applicants can often expect to pay a premium of at least 10–20% more than the lowest traditionally underwritten coverage available on the market. For someone who is eligible for their desired coverage at $50/month, this could mean an extra $5 to $10 or more in monthly premiums over the life of their policy.
Another downside to instant-issue coverage is the death benefit limitations. On the current market, most instant-issue policies cap coverage at $1 million to $2 million of death benefit. These low maximum benefits could leave someone significantly underinsured if instant-issue coverage is all they have in place. Furthermore, if they are going to go through the hassle of traditional underwriting to get their desired coverage in place, then it might make more sense just to get all of that coverage through traditional underwriting.
That said, as noted in the prior section, there could also be some benefit in ‘diversification’ of the underwriting processes one goes through and securing $2 million through instant-issue coverage (where nothing new will be discovered that could increase cost) and then $3 million on top of that via traditionally underwritten coverage (which could be less favorable due to health issues identified). This is a viable strategy to get $5 million in coverage, as well as simply applying for $5 million of traditionally underwritten coverage with the intent to replace the $2 million of instant coverage if the coverage is offered at a more favorable rate. Nonetheless, coverage limits are certainly a factor that needs to be considered when deciding what type of underwriting to go through.
Differences in the convertibility of policies are another downside to consider with instant-issue coverage. While traditionally underwritten coverage will often have some valuable options for converting coverage to permanent insurance, in today’s marketplace, most instant-issue coverage is not convertible. Bobby Samuelson, Editor of The Life Product Review website, has argued that convertibility of term insurance is far more valuable than generally appreciated (Blog entry #248 – The Price of Term Conversion). If traditionally underwritten term insurance is both more valuable (convertible) and cheaper, then this just further raises the ‘cost’ of the behavioral and other advantages of instant-issue coverage.
As noted previously, unfortunately for those with less-than-ideal health, the health requirements to qualify for instant-issue coverage are stricter than those for traditionally underwritten coverage. Instant-issue coverage may simply not be an option for a significant number of individuals, particularly those that would be offered substandard or table-rated coverage (generally for applicants with higher risk levels or more serious health conditions).
Similarly, pursuing instant-issue coverage could result in a higher risk of insurance denial. While denials do not show up on an MIB report directly, a number of applications could raise suspicion, and almost every insurance application is going to ask if someone has been denied coverage in the past. As a result, if a denial is a likely outcome, it may be best to start with traditionally underwritten coverage that has a greater likelihood of providing a favorable outcome.
While medical exams are inconvenient, perhaps the easiest benefit of traditionally underwritten coverage to underappreciate is the medical exam itself. Life insurance policies will generally have a 2-year incontestability period. In the absence of fraud, the incontestability provision prevents a life insurance company from contesting a policy once it has been in place for 2 years. An example may help illustrate why a medical exam can be beneficial:
Example: John applies for term life insurance and accurately states his current weight at 150 pounds.
Unfortunately, John develops a disease that leads to rapid onset weight gain, and his weight increases to 200 pounds less than a year later.
In the example above, if John went through traditional underwriting, it’s going to be very clear that there was no fraud or misrepresentation here. The insurance company conducted their own physical of John and verified that he actually weighed 150 pounds at the time of application.
By contrast, suppose John instead applied for instant-issue coverage. If a physical was never conducted and the insurance company notices a new medical record that indicates John currently weighs 200 pounds, some flags might be raised regarding the truth of what was stated in his application. While carriers are generally more concerned about fraud than unforeseen changes in someone’s health during the contestability period, it is less clear with instant-issue underwriting that John was being truthful during his initial application.
As a potential defense to this, it may be advisable to pursue a physical shortly after securing instant-issue coverage to provide a record of someone’s health at a given date. In John’s case above, if he had a physical from a month later that confirmed his application weight of 150 pounds, then he would be in a much stronger position to argue that he did truthfully disclose his health and that his health condition that led to rapid onset weight gain was not known at the time.
Ultimately, there are a number of cons to instant-issue coverage, and these should be weighed against the benefits to ensure that a client is pursuing the best type of underwriting for their situation.
When Does Instant-Issue Coverage Make The Most Sense?
While it is hard to generalize – the answer to the question of whether something should be recommended to a client in financial planning is almost always, “It depends” – there are at least a few key areas to consider to determine whether instant-issue term coverage makes sense.
Who Is Driving The Purchase?
In many cases, an advisor is the one pushing the client to get life insurance in place. If that is the case, then this is a situation where the risk of behavioral barriers (e.g., paperwork/application procrastination, scheduling and completing the medical exam, etc.) getting in the way of implementing coverage are greater. There are certainly variations in the degree of motivation (e.g., “Meh, do I really need coverage?” versus “You’re right, I should get that done once I have some time.”), but the more the advisor is driving the process, the greater the potential behavioral benefits of instant-issue term insurance.
So long as the client is convinced that life insurance is in their best interest, then instant-issue coverage could be approved shortly thereafter. If we’re considering scenarios where potential outcomes are some coverage and no coverage, then at least getting some coverage in place is tremendously valuable to the client and those that would be adversely impacted by their premature death.
While it may be less common than the alternative, there are times when clients are the ones driving the purchase of insurance. They know they want or need some coverage and are motivated to get it done. In this case, the behavioral barriers to getting coverage in place are likely less of a risk. If a client is intrinsically motivated to get coverage in place, then they’ll be more inclined to push through barriers, even if it means restarting the underwriting process with another company. As noted previously, there might still be benefits to instant-issue coverage to consider, such as the reduced risk of learning something new about a client during underwriting, but overall behavioral benefits are significantly reduced.
These behavioral considerations do inevitably raise some difficult questions about how advisors ought to best serve as “behaviorally enlightened fiduciaries”. How paternalistic should a fiduciary advisor be in making this assessment?
Presumably, an advisor should at least be making a client aware of possibilities to secure cheaper and more valuable (e.g., convertible) coverage through traditionally underwritten products, but what exactly should that disclosure look like? The following is one way such a disclosure could be provided:
Mr. and Mrs. Client, I’m recommending that you purchase instant-issue coverage. This coverage would cost you about $50 more per month than some traditionally underwritten coverage, and that traditionally underwritten coverage would also have financial benefits such as being convertible to permanent insurance if you choose. That said, I don’t think the benefits are worth the extra hassle in your case.
While the disclosure above provides transparency around the client’s options, what if an advisor genuinely believes framing the disclosure this way would lead the client down a path that is ultimately not in their best interest because one of the spouses really doesn’t want the insurance in the first place and is unlikely to take the call from the insurance carrier and complete their phone interview? Maybe this is even the advisor’s second attempt at getting their client insured, and the client has a history of this behavior.
By contrast, taking a more paternalistic approach might minimize potential behavioral barriers, helping the client get the coverage they need more efficiently. Consider this alternative disclosure:
Mr. and Mrs. Client, there are some options to potentially get some coverage in place that could be cheaper and have a few advantages, but those methods require a medical exam and some extra hassles that I don’t think make the benefits worth the costs in your situation.
This second example is arguably less transparent than the first, but it is framed in a way that more strongly nudges the client toward the instant-issue term coverage. But where is the proper line to draw here in terms of how paternalistic the advisor is being?
The point here isn’t to provide a definitive answer (if one even exists?) on the proper level of disclosure here, but just to note that the paternalism involved in assuming benefits based on client follow-through (or lack thereof) can get us into some very tricky ethical dilemmas.
Does The Client Have Existing Coverage?
A second major factor in deciding what type of underwriting to pursue is whether the client has any existing coverage in place. If a client has $1 million of term insurance in place but is bumping up to $2 million, then arguably, the lack of follow-through and other risks will probably be diminished. Furthermore, presuming the initial coverage was traditionally underwritten, the client should understand the process and know what it entails.
By contrast, if someone is going from $0 of coverage at all to $1 million of coverage, the benefits of getting at least some coverage in place may be much greater. There’s also more uncertainty about the process and the client’s willingness to see it through. If a client is making their first insurance purchase, then instant-issue term insurance might be a great place to start.
Another consideration here is that the client wouldn’t be locked into an instant-issue policy forever. Particularly if a client is young and experiencing high-earnings growth during the beginning of their career, then getting $1 million of instant-issue term coverage in place may be a great place to start, and then when the time comes 5 years down the road to purchase $2 million of term, they could look at replacing their instant-issue term coverage with a traditionally underwritten policy.
It's worth thinking about the degree to which we are ‘optimizing’ here. For many clients who are first working with an advisor and walking in with a messy situation (no estate docs, no life insurance, no tax planning, etc.), going from no life insurance to some life insurance is far more beneficial than going from some life insurance to optimal life insurance.
Imagine that a client walked into an advisor’s office already owning instant-issue term insurance. Is replacement life insurance going to make the advisor’s triage list in terms of the most crucial items to improve? Probably not. If they don’t have estate documents, their portfolio consists of shitcoins and meme stocks, and their ex-spouse is listed as the beneficiary on their 401(k) plan account, then their instant-issue life insurance isn’t going to be a top priority. But progress is made in all areas over time, and eventually, the opportunity to ‘optimize’ and address the instant-issue life insurance with replacement with a traditionally underwritten product will become greater.
The key point here is that, all else being equal, if someone is getting their first life insurance policy, instant-issue term insurance may be worth giving greater consideration.
Ultimately, there will never be a one-size fits all answer to what type of insurance is best, but for many individuals, the rise of instant-issue term coverage may provide opportunities to at least get some coverage in place in an efficient and hassle-free manner.
There are certainly downsides of instant-issue coverage to consider, but particularly for clients who have struggled to get life insurance in place and aren’t intrinsically motivated to see the process through to the end, instant-issue term insurance may be a solution worth giving some serious consideration.