When choosing a policy, it helps to understand what determines your rates. Discover how does the life insurance underwriting process work.
How Does the Life Insurance Underwriting Process Work Exactly?
If you’re new to life insurance, it can seem a bit overwhelming at first. With so many companies and plans available, it can be difficult to figure out the right plan for your needs. Even then, once you determine adequate coverage, the question becomes, “will it be affordable?”
Regardless of your situation, life insurance is almost always a smart choice. Unless you’re independently wealthy and/or your beneficiaries won’t be hurting financially after you die, a policy can provide peace of mind.
One of the best ways to make life insurance easier to understand is to learn about the underwriting process. Once you know what insurance companies pay attention to when drafting your policy, it’s easier to narrow down the options. So, let’s take a look at how life insurance underwriting works.
What is the Purpose of Insurance Underwriting?
Whether you’re buying insurance for yourself, your home or your car, the company providing the coverage wants to assess any potential risks. Insurance carriers are for-profit businesses, but they can’t make money if they pay out too much in benefits.
When it comes to life insurance, underwriters will pay attention to your health. Specifically, they want to know how long you are likely to live and whether any conditions could shorten your lifespan. So, the healthier you are, the less risk there is to the insurance company.
One critical point to note is that risky individuals can still get coverage. For example, if you have a terminal illness or are a smoker, you can purchase life insurance.
However, because you are in a higher risk group, you will have to pay more in premiums. Overall, underwriting determines your rates, although some conditions can get you declined for a policy.
Which Factors Go Into Insurance Underwriting?
Although your health is the primary condition that companies pay attention to, multiple risk factors can come into play. Here is a breakdown of the various elements that underwriters will look at when drafting your policy.
As a general rule, older individuals are less healthy than younger ones. As the body ages, it takes longer to recover from diseases and injury, complicating the healing process.
So, if you’re trying to save money on life insurance, it’s always good to buy a plan as early as possible. No matter how healthy you are, the rates go up as you age.
Most insurance companies have a maximum age limit for their plans, which is often 80 or above. That being said, there are some limited options for individuals older than that.
While it might seem sexist at first, insurance companies use data to determine rates, not bias. According to statistics, women tend to live longer than men, so they will often have lower monthly premiums. So, if you compare a man and a woman with identical risk factors (i.e., age, occupation, health), the woman will still pay less.
Health and Medical History
Although your health is critical in insurance underwriting, you may not have to provide an in-depth medical history. For example, suppose you’re going to purchase a modest term insurance plan, and you’re relatively young (i.e., under 40). In that case, you shouldn’t have to take a medical exam or submit health-related documents.
Typically, insurance companies want to know as much about your health as possible when you have a substantial death benefit (i.e., $1 million or more) or reach a certain age, such as 50. The components that underwriters scrutinize the most include the following:
If you’re a smoker, you will have to pay higher rates no matter what. If you are a former smoker, most insurance companies will still charge more if you quit within the last two years. However, these conditions vary between carriers, so be sure to compare rates as much as possible.
While you may have one or more underlying health conditions, insurance companies want to know if they have ever sent you to the hospital. For example, if you have diabetes and were admitted to a clinic for low blood sugar, you would be considered a higher risk.
As a rule, the longer it’s been since you were hospitalized, the less it will affect your rates. Also, be aware that chronic visits will make you riskier in the eyes of underwriters.
If you’re suffering from a disease like cancer or AIDS, you will have severely limited life insurance options. While there are guaranteed-issue plans, they often have a two-year waiting period. So, if you die within that time, your beneficiaries will only receive a portion of the death benefit.
Alternatively, if you are in remission or have recovered from a terminal illness, underwriters want to know the likelihood of a relapse. For example, you may be taking medication to stay healthy. Some companies may assign more risk because of ongoing treatment, while others might allow you to get the best rates.
Many individuals may have a chronic or pre-existing condition, which, while not fatal, requires ongoing treatment. Some examples of these can include diabetes, asthma, high blood pressure, or epilepsy.
The severity of your condition will determine which classification you will receive, and the underwriters will want to make sure that you’re following your physician’s orders. Usually, the more you have the disease under control, the better your rates.
Life insurance is one of the only types of plans that will pay attention to what you do in your personal life. Typically, your lifestyle won’t come into play, unless you fit into one of these categories:
- Drug and Alcohol Abuse – If you’re taking any illicit substances, you cannot get life insurance. However, legal drugs like alcohol or marijuana can still impact your rates. Underwriters want to know how often you partake and whether your habits have affected you. For example, if you have a DUI on your record, your rates will increase.
- Extreme Hobbies – Activities like skydiving will make you riskier for insurance companies. Again, what matters most is how often you do it and whether you’ve been injured or hospitalized.
- Occupational Hazards – Some jobs have inherent risks involved that can raise your rates. Most occupations won’t affect your coverage options, but be aware that some will (i.e., coal miners).
How Do Insurance Underwriters Collect This Data?
To continue to answer the question of how does the life insurance underwriting process work, we have to ask how the collect data. As you can see, you have to provide a lot of details to the insurance company. There are multiple ways for underwriters to collect this information, but not all policies will require every component. Here is a breakdown of the various methods that insurers use to get an idea of your risk level.
Regardless of the type of coverage you want, you will have to fill out an application. This document will provide basic details, such as your age, health conditions, and policy type. In some cases, an insurance agent will conduct a phone interview to verify the details you provided.
When filling out a life insurance application, be as thorough and detailed as possible. Also, it’s never a good idea to lie for any reason. If you do lie, then you can be putting your death benefit at risk.
Typically, there is a two-year period after your death when the insurance company can try to determine fraud. If they are successful, your beneficiaries will get nothing.
In some cases, you won’t have to take a medical exam, but it helps to be prepared if you do. Usually, the insurance company will send an examiner to your home or office (whichever you prefer) to conduct the test. This exam is non-invasive, and it will provide various health information, such as your height, weight and blood pressure.
In many instances, the insurance company will want to take some blood and perform a drug test. This way, the underwriters can assess any potential risks, such as heart disease or diabetes.
One benefit of taking a paramedical exam is that you can use the results for different insurance companies. This way, you don’t have to take multiple tests before finalizing your policy.
If there are any issues with your blood tests, the insurer will likely ask for an attending physician statement (APS). This is a document that your primary physician provides to explain any potential risk factors.
For example, if your blood pressure was high during the test because you were nervous, the APS can show that it’s not a chronic problem. This document also lists any medications you’re taking and their side effects.
Medical Information Bureau
Because fraud is always a potential problem, insurance companies will consult with the Medical Information Bureau (MIB). This organization allows different carriers to see where you have applied and compare the information you provided on each application.
The MIB can also provide details about your medical history, such as any prescriptions you’re taking. This check-in is why you need to be honest and accurate on your application form. Insurers can verify the details independently, and if they suspect fraud, you will get declined.
Many insurance companies will want a complete rundown of your driving history within the last five years. They are looking for risky behaviors, such as speeding, reckless endangerment, or a DUI.
If you have one of these citations on your record, your rates will go up. If you have multiple citations (particularly DUIs), then you may get declined, depending on the type of coverage you want.
Although each individual is unique, insurance underwriters want something to compare you to when drafting a policy. To do this, they use actuarial tables. Usually, these tables will differ between companies, but they all should be relatively similar. The two primary options are:
- Mortality Table – This chart shows the likelihood for someone within a specific demographic to die. One example could be a 45-year-old male.
- Build Table – Insurers will measure your body mass index (BMI) and analyze it based on your age and gender. Overall, the heavier you are, the riskier you are.
A Quick Breakdown of Rate Categories
Once insurance underwriters collect all of this data, they will assign you a specific rate classification. While exact premium costs vary by company, most carriers will have these categories. Some insurers may have additional classifications, so pay attention to the differences when comparing plans and rates.
- Preferred Plus – You’ll fall into this category if you’re in excellent health, have no problems on your medical record, and you’re relatively young. These rates are the lowest cost, so you want to aim for this class if possible.
- Preferred – Realistically, you won’t qualify for preferred plus if you have any issues, but you may get into this category. Overall, you’re in good health, but you may have one or two minor issues, such as high blood pressure or obesity. You can qualify for preferred rates as long as you’re not taking medication, and your condition doesn’t worsen over time.
- Standard Plus – In this case, you may have one or two minor medical problems that require ongoing treatment.
- Standard – If you’re taking medication for a significant health issue (i.e., diabetes), you’ll likely be in this classification.
What If I’m Considered Too Risky? Can I Get Declined?
Most individuals will fall into one of the categories listed above. However, you may be considered too risky in these situations:
- Old Age – If you’re close to or over 80 years old, most insurance companies will decline you for standard coverage.
- High-Risk Occupation – If you have the potential of dying on the job, you may get denied a policy.
- Alcohol or Substance Abuse – As a rule, alcohol abuse is considered when you are hospitalized or have undergone significant treatment for alcohol-related problems.
If you do get declined for standard rates, don’t worry. There are two options available for those who are considered “too risky.”
- Burial Insurance – These policies have a much smaller death benefit, and you can qualify even with significant health issues. With burial insurance, what matters most is whether you have a two-year waiting period before benefits kick in.
- Guaranteed Issue Life Insurance – This plan is only for those who can’t get covered any other way. The rates are substantially high, and there is a waiting period, no matter what.
We hope this answered your question of how does the life insurance underwriting process work?
Contact NextGen Life Insurance Today
The best way to ensure that you’re getting the best rates is to compare companies and plans. At NextGen Life Insurance, we’ll do the hard work for you so that you can focus on what really matters. Contact us today to get started.