Dealing with increased carrier requirements: An ounce of prevention

By Jeff Reed

Kestler Financial Group

Before we grab our torches and pitchforks and join the angry mob over form 4506T-EZ, let's take a look at why this is being implemented and how we can deal with it.

In the last few weeks I have had at least two proposed insureds decline to provide any financial information on their life application. Their rationale? "Well, it's none of the carrier's business what my net worth is or how much money I make."


I am 100 percent positive that none of these clients would enter into a financial transaction in which they were "on the hook" for hundreds of thousands or even millions of dollars without some information regarding the other party's financial condition. Nevermind that there are insurable interest laws that need to be followed.

Of course, facts and logic are often lost in these discussions, so we are left to deal with clients who, as one recently did, "respectfully decline" to answer the financial questions. My cynical side immediately wanted to respond that the insurance company would respectfully decline to offer coverage as a result. Luckily, I was able to contain myself and come up with a more appropriate response.

Why bring this up? One of our carriers has just instituted a new form requirement for any insured over age 26, the 4506T-EZ. Never heard of it? You will, because this carrier is certainly not going to stand alone as the only one requiring it. What does this form do? It allows the carrier to go directly to the IRS for information about the client's tax filings. Needless to say, the initial reaction from some in the field has been less than positive.

Before we grab our torches and pitchforks and join the angry mob over this, let's take a look at why this is being implemented and how we can deal with it.

First, the why. In a word: fraud. Every one of our carriers is spending more time than ever investigating fraudulent activity in life insurance transactions. Most of this fraud has centered on income and net worth documentation. In that light, I see their point clearly, and agree that this ounce of prevention (additional disclosure) is worth a pound of cure (fraud investigations after the fact). I do think, however, they have applied this requirement too broadly.

One of the other selling points the carrier is touting is that it will speed up underwriting. They do not intend to pull tax returns on every case. If there are questions they need clarified, they can now go straight to the IRS rather than have to wait for the client or CPA to provide the information. It may also actually be a bit more private, as this information bypasses the agent and general agency completely (I'm not sure this is a good thing!).

Also, this form is routinely required for other financial transactions, such as a home or auto loan. All of that aside, how do we deal with this new reality?

One strategy, initially, is to avoid that carrier. However, I do not anticipate them being the only carrier to go down this path, so we will need a better answer than that sooner or later.

That answer comes down to our presentation of the document. Most clients have no idea what the actual insurance application process entails. If we position this as a normal part of the process, most will simply sign and move on. However, if we pay an undue amount of attention to this new and onerous requirement, so will the client.

I would compare this to a change in a product like a bonus on an annuity. Many producers will throw up their hands when there is a reduction, thinking that there is no way they can sell the product with the reduced bonus. The truth of the matter is that your prospect probably has no idea that there was a 10 percent bonus last month. He's just excited about the 5 percent he can get today.

If the producer manages to keep what is in the past in the past where it belongs, the client will never feel as if they are missing out on something. Present this new form as if it has always been part of the process and it becomes a non-factor for most clients.