The Basics of Life Insurance Underwriting

Life insurance companies each have their own extensive policy and procedure manuals they are supposed to follow in determining whether or not to issue an individual life insurance policy and in pricing that policy. The insurer’s underwriters typically use a combination of factors that experience shows equates with the risk of death (and premature death). 

They include the applicant’s answers to a series of questions such as:

1. age;

2. sex (except in several states that require “unisex” rates, even though actuarial data shows women live longer than men);

3. height and weight;

4. health history (and often family health history—parents and siblings);

5. the purpose of the insurance (such as for estate planning or business or family protection);

6. marital status and number of children;

7. the amount of insurance the applicant already has, and any additional insurance the applicant proposes to buy (as people with far more life insurance than they need tend to be poor insurance risks);

8. occupation (some are hazardous and increase the risk of death);

9. income (to help determine suitability);

10. credit history (relates to character and responsibility);

11. smoking or tobacco use (this is an important factor, as

smokers have shorter lives);

12. alcohol (excessive drinking seriously hurts life expectancy);

13. certain hobbies (such as race car driving, hang-gliding,

or piloting noncommercial aircraft); and

14. prevalence or frequency of foreign travel (certain foreign travel is risky).

Most life insurers require the applicant to undergo a physical examination by a doctor, nurse, or a paramedical technician on large policies. At that time, the examiner typically takes samples of the applicant’s blood and urine. The insurer usually will also request the applicant’s medical records from his or her physicians, and have the underwriters review them.

In addition, the underwriters check the applicant’s health history with the Medical Information Bureau, the driving record, credit records, and do other investigations that seem warranted. The greater the amount of insurance sought by the applicant, the greater the extent of the investigation into the applicant’s medical, financial, and personal history.

After the application and medical information is completely gathered, the underwriters make their underwriting decisions. First—if the policy has underwriting requirements —they decide whether the applicant qualifies for insurance at all. For example, if someone had cancer within the past year, or has AIDS, the applicant might not be able to buy underwritten life insurance at any price or at a very high cost from a company that specializes in issuing policies to those who have the applicant’s high-risk profile. Second, underwriters classify the risk, which affects the price of the coverage.

Most applicants receive either a “preferred” classification (intended for those who are above average risks) or a “standard” classification. If a person has a history or characteristics that suggest the applicant is riskier than average (perhaps because the applicant is fifty pounds heavier than average for his or her age and height, has high cholesterol, or had heart bypass surgery five years ago) the policy would be “rated,” and offered at a higher price based on that rating, given the applicant’s age.

Each insurer may evaluate an applicant differently so that a person one company would regard as “preferred” would be “standard” at another company, and perhaps even “rated” at yet another company. Also, some companies rate up to 70 percent of all applicants as “preferred” (to make applicants and agents feel good about themselves and the company) but charge more than other companies would charge for a “standard” rating.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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