Getting life insurance when you have diabetes is a challenge. For starters, insurance companies only insure risks for which they can assume. Life insurance companies must purchase insurance from other life insurance companies, a process called “reinsurance,” when they must insure extraordinary risks. Diabetes is one such risk that often requires reinsurance. Reinsurance allows the insurer to spread the risk of death out over several insurance companies.
If you have diabetes, you should work with someone who specializes in pre-qualification and high-risk placement.
Pre-qualification is a process of contacting insurance companies before submitting an application. By doing this, the insurance broker can speak directly with underwriters who will assess the risk to the insurer. The underwriter can then advise the broker on how to proceed with the application so as to obtain coverage.
In some instances, only part of the necessary coverage can be purchased from a single insurer. The broker must then shop around for other insurers willing to take on the additional risk or purchase reinsurance for the diabetic. If the diabetic applies directly, without the help of a broker, he risks being turned down without any offer for future insurance coverage. Once this happens, it becomes more difficult to obtain coverage with another company. As the denial letters accumulate, the diabetic must accept the fact that he is uninsurable.
Adverse risk cases refer to exceptional risks that an insurance company must take on. In order to provide insurance for diabetics, underwriters must be willing and able to draft an insurance contract with graded benefits. The graded-benefit policy extends insurance to the diabetic on a conditional premise. If the diabetic pays the required premiums, the insurer will extend coverage on a guaranteed basis. Benefits will be graded, meaning they will accumulate over time.
Graded-benefit policies almost always use whole life insurance as the chassis for the product. This is because whole life insurance is the only type of policy that offers guaranteed premium payments, death benefits, and cash value. Once the insurance company has approved the application, the diabetic is given a face amount of insurance. However, he must earn this coverage over time.
During the early years of the policy, the diabetic’s death benefit is equal to the total premiums paid into the policy, plus a fixed rate of interest declared by the insurer. Each year, as the cash value increases, the insurer extends additional coverage until the graded benefit equals the face amount originally issued by the insurer. This is done to minimize the risk to the insurance company and provide assurance that a single policyholder does not represent a catastrophic risk to other policyholders.
Once the diabetic’s graded benefit equals the face amount, the policy functions the same as any other whole life policy. If the diabetic misses a premium payment, the policy lapses. If the diabetic dies prior to having earned the full face amount, the beneficiaries only receive the amount actually earned and not the full face amount.
Graded-benefit policies are always more expensive than traditional whole life insurance policies. The added risk that the insurer takes is often substantial, especially for type I diabetes. Even still, diabetics shouldn’t be discouraged or completely write off the idea of buying insurance. They may qualify, but they’ll need help.