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What Does Life Insurance Underwriting Mean For Me
Article 6 of 12 in What to Know Before You Buy Life Insurance
Life insurance underwriting refers to the process the insurance company uses to assess the eligibility of a potential client based on how much of a life insurance risk they are. This process starts with the customer filling out a life insurance application designed to discover personal information, health habits, medical history, and any occupational or recreational activities that can create the risk of death. The purpose of life insurance underwriting is to determine how much of a risk the applicant is, and either deny coverage or set the cost of the policy accordingly.
TIP: Life insurance underwriting is how the insurance company determines its best chances to make money off the life insurance product. The company makes money by collecting premiums and not paying death benefits, or paying the benefits only after a long period of premium payments are collected. Underwriting essentially calculates life expectancy, and suggests how much a policy should cost based on how long the applicant is projected to live.
Personal Information in Life Insurance Underwriting
Part of the small print on your life insurance application gives the insurance company's underwriter permission to obtain certain information about you. In signing your life insurance application you are giving your consent. This includes obtaining your credit report, driving record, medical records or you maybe required to submit to a medical exam if necessary. The underwriters look for anything that shows you are a greater risk of either not paying your premiums or dying early and forcing a large pay out. For example, a driving record could reveal several DUI's and therefore place you at a higher risk of death in a car accident. A hazardous job could result in an occupational death. A bad financial situation could suggest suicide. All of this information is used by life insurance underwriting to determine if you are a good or bad life insurance risk.
Most underwriting for life insurance involves obtaining a Medical Information Bureau (MIB) report. The MIB is a large database that collects information on medical visits, hospital stays and insurance payments or denials. It is important to note that the MIB also lists any previous life insurance applications you have completed, and reports this red flag to any future insurers.
Life Insurance Underwriting in Action
Life insurance underwriting will determine the premium payment charged to the insured party. Applicants who are younger, have fewer health problems, and don't smoke or engage in dangerous activities will likely pay less for their policy. Whereas unhealthy people, the elderly, and smokers will go through extensive underwriting and end up paying a higher premium.
- For example, a healthy 35 year old who weighs 150 pounds can expect to pay significantly less than a 35 year old who has diabetes and weighs 300 pounds. The person with diabetes would be rated higher than the person that has no illness or health problems.
For small policies or healthy applicants, there is typically not a significant underwriting process. However, for larger policies or potentially high risk applicants the process can be quite extensive.
- For example, a 25 year old purchasing $100,000 of life coverage with just a few questions and showing no health problems could be issued a policy immediately. However, a 75 year old asking for the same policy might have to have a physical exam by a doctor and give more information. The older applicant may even be forced to reduce the amount of insurance he applies for, and pay a higher premium payment.
TIP: The underwriting process is designed to screen out people who are uninsurable or a bad life insurance risk and classify the remaining applicants in a way that the insurance company can collect the right premium price.
Life Insurance Underwriting Ratings
Underwriters classify life insurance risk in categories known as a rating class. There are several life insurance underwriting rating classes:
- Preferred - You are a low risk. You are not sick; don't have a high-risk job or hobby; have a clean bill of health. You pay a lower premium.
- Standard - You are an average risk. You may have had some health issues in the past, but don't have a terminal illness or a high-risk job or hobby. You pay an average premium for similarly situated insured parties
- Substandard - You have a high-risk job, such as a pilot, scaffold worker or diver; or you have a chronic illness like diabetes, heart disease or high blood pressure. You pay a higher premium.
- Uninsurable - You have a terminal illness. You will not likely find an insurer to sell you a policy. You are a high risk.
TIP: It is possible to get the best rating class by changing your habits. Quit smoking, lose weight, exercise to lower your blood pressure. It is possible to reapply in a year or contact life insurance company and advise them of your life style change to get a better rate.
Differences Across Insurance Companies
Some companies only write the healthiest risks and do so at preferred rates. Other companies are comfortable taking in people who are less than perfectly healthy and take in a range of risks. Such companies may promise guaranteed issuance of a high risk life insurance policy despite your health problems. If you have or have had an illness or health condition, it is best to work with a professional or insurance agent who will obtain quotes from insurance companies who's life insurance underwriting allows for such risk.
TIP: Underwriting for life insurance varies from company to company it. One company's standard for a rating class may not be the same as another company's. Therefore, do your comparison shopping by obtaining an comparing several quotes.
It is important to understand life insurance underwriting because it gives you suggestions on how you can get a cheaper life insurance policy. Once you know how a company underwrites, you can find one that works for your lifestyle or even make changes to your health and recreational habits to make yourself less of a risk. If you have any additional questions on life insurance underwriting, ask a professional. To receive comparison life insurance quotes, click here and Free Advice will help you find affordable life insurance quotes for you circumstances.
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