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FINANCIAL PROFILES

Ten Tips: Financial Underwriting in the Business Market

Packaging your business cases from a financial underwriting perspective is critical to you and your
clients success. Here are ten tips that can help you position your case to win:
1. Think Like an Underwriter. Assume the underwriters perspective. Is this a good risk for the
company? Is there a clear insurable interest? How was the amount of insurance determined? Is
this a case of over-insurance? Can the client afford future premiums?
2. Provide a Company Profile. Make certain that your cover letter tells the whole business story.
Give a clear picture of the tax structure of the business; the owners and their percentage
ownership; and include a short narrative of the history of the business and its owners. An easy
way to find this information is to visit the companys web site.
3. Be Consistent. The application, cover letter, and supporting data should all tell the same story.
Conflicting statements and numbers need to be explained. Build your strengths but dont hide the
negatives explain them.
4. Provide a Clear Statement of the Life Insurance Purpose(s). In the business market, the life
insurance sale generally falls within one of four basic uses: key person coverage, buy-sell
arrangements, business loan protection, or executive benefits. Clearly identify the business
purpose that the life insurance policy will serve. Remember, there can be more than one need.
Be careful that the ownership/beneficiary structure you propose matches the typical format for the
business need you are funding (e.g., for key person coverage, the business generally is the
owner and beneficiary of the policy.)
5. Know Prudentials Underwriting Guidelines. The starting point for any case is a clear
understanding of the parameters that will be applied to a particular situation. Familiarize yourself
with Prudentials underwriting guidelines:
Financial Underwriting Guidelines (0163802)
Financial Underwriting Highlighter (0163368)
If you are outside of these guidelines, realize that you will have to add additional supporting facts
to win your case.
6. Use the Internet. If additional supporting data is needed, dont hesitate to use the Internet to
search for information on the business, its owners, the industry outlook, UCC (Uniform
Commercial Code) debt filing, etc.
This training material has been prepared to assist our licensed financial professionals. It is designed to provide general information in regard to the subject matter covered. It should be used with
the understanding that Prudential is not rendering legal, accounting, or tax advice. Such services should be provided by the clients own advisors. Accordingly, any information in this document cannot
be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code.
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7. Key Person Coverage. The face amount is generally based on a multiple of salary.
Make certain you include total compensation not just W2 income (e.g., bonus, car allowances or other
employee perks, options, deferred compensation, distributions from partnerships or LLCs).
Coverage in the range of 5-7 times compensation is normal. If a larger amount is needed, build your
case.
Is the insured a Star? Past successes are important. Give us a reason to see why this person is so
important that the guidelines should be stretched.
Remember, what is really being valued is the loss to the business, and that may not always be
reflected by the key persons compensation. There may be executive search costs, lost sales during
transition, loss of credit lines, etc.
8. Buy-Sell Arrangements. The fair market value (FMV) of the business is the key to determining the face
amounts that can be issued.
Capitalize the average (or weighted average) of multiple years earnings (adjusted net income) to derive
an estimate of the companys fair market value as a going concern.
The capitalization rate for most closely held businesses ranges from 10-15%. That translates into an
income multiplier of 7-10.
If you are asking for coverage in excess of the above multiples, build your case.
9. Business Loan Protection. The amount and terms of the loan are key to determining the face amount
that can be issued.
Documentation of the terms of the loan and the amount of debt remaining is needed.
If debt is a line of credit, what is the average outstanding debt on this agreement for the last 2-3
years?
Underwriters consider the length of the loan as related to the term of the policy.
Underwriters generally will cover only a percentage of the outstanding debt.
10. Does It Make Sense? Learn to think like an underwriter. Anticipate the underwriters questions and be
prepared to provide answers. Above all, as you proceed through the underwriting process, keep asking
yourself at each step, Does it make sense?