Life Insurance Underwriting
Life insurance can be a source of funds for your family or business associates to meet their needs in the event of your death. You enter into a contract with an insurance company, which promises to provide your beneficiary (ies) with a certain amount of money (the death benefit) upon your death. In return, you make periodic payments, known as premiums.
What is underwriting?
Underwriting is the process of determining which risk class is most appropriate for the proposed insured based on several possible factors including age, gender, current physical condition and medical history, financial background, personal habits, avocation and relevant hobbies (such as aviation).
Why do we underwrite?
Underwriting is a necessary part of applying for life insurance. Underwriting ensures that individuals are properly classified in the appropriate risk class. The process also protects the company from fraud and those that misrepresent themselves. Ultimately, the underwriting process benefits consumers and the company by classifying people according to their level of risk. By clarifying individuals into the correct risk class, insurers are able to keep premiums down, making life insurance more affordable for the vast majority of applicants.
What are the different risk classes and how do they apply?
Insurance risk classes are based on large groups of people with similar characteristics, and risk classes are based on the mortality of the group. Your specific mortality may be different from the larger group. A declination of coverage is not a specific reflection on your health or likelihood of dying. Underwriting decisions can be in one of several risk classes or an outcome to postpone or decline coverage.
Preferred: Preferred classes generally represent a better than average risk and may be charged preferred or lower rates.
Standard: Standard class generally represents a standard or typical risk and is charged the standard rate.
Rated: Rated classes generally represent an above average risk and are charged higher premium rates than Preferred or Standard classes.
Postponed: Occasionally cases are postponed until additional information can be gathered, a specified time has passed for information to be re-evaluated or until factors influencing the underwriting decision change which would result in the underwriter being able to classify the cases in the appropriate risk class.
Declined: Declined cases represent an uninsurable risk and coverage is declined. Declination decisions are for at least two years or longer depending on the particulars of the case, at which time the client may reapply for insurance coverage.
What information is used during the underwriting process?
The underwriting department has access to many sources of information in order to determine the appropriate risk class for each proposed insured. Information requirements vary based on age and the amount of coverage requested.
Sources may include:
- Extensive searches of public records including driving records, real estate and criminal history
- Blood work, which provides a variety of information including cholesterol, glucose and kidney and liver function tests
- A paramedical exam to measure height/weight, blood pressure, pulse and ask health questions of the proposed insured
- Medical records including Attending Physician Statements
- Prescription drug history database checks
- Insurance purchase activity as well as major impairments reported to the medical information bureau
- Your responses to questionnaires on occupation, hobbies and travel
- Review of financial questionnaires
- Inspection reports, which is an interview by an approved inspection company to collect additional personal or business information
What happens during the underwriting process?
During the underwriting process, underwriters gather and review information about the proposed insured to determine the appropriate risk class based on the level of risk they pose. Here are some hypothetical scenarios to demonstrate how the underwriting process works:
Scenario 1: A 30-year-old female in good health, applying for a policy with a death benefit of $250,000 could expect to complete a paramedical exam, submit blood work and a review of her driving records and relevant medical databases.
Scenario 2: A 55-year-old male with elevated cholesterol and hypertension, applying for a policy with a death benefit of $1 million could expect to complete a paramedical exam, submit blood work, have an EKG and review of relevant medical databases. He may also have his medical records reviewed and may be subject to additional tests, such as a stress test to check cardiovascular function.
Scenario 3: A 75-year-old female, applying for a policy with a death benefit of $3 million could expect to have several requirements reviewed during the underwriting process due to her age and the amount of coverage applied for including functional and cognitive tests, blood work, an EKG, driving records and relevant medical databases and completion of a financial questionnaire.
How long does the underwriting process typically take?
The time to underwrite varies depending on the age of the insured and the amount of coverage applied for. For example, in simple cases with few underwriting requirements, underwriting could be done within a day to a week. Generally, more requirements are required for older-age applicants and for higher amounts of coverage. In those instances, underwriting may take as long as a few weeks to a few months. To expedite the underwriting on a policy, it is helpful to let your physician know that you are applying for life insurance coverage and ask that he send your complete medical records when requested in a timely manner.
Members of our office staff work to get requirements to our underwriters as soon as possible. Our underwriters work to assess all information and make a decision in a timely manner.
All underwriting standards and requirements we use to make rating and premium decisions are subject to change over time.
For additional information, please contact your insurance representative or registered representative.