What Is Underwriting In Life Insurance?

Looking to apply for Life Insurance but not quite sure what's involved?

If you have ever applied for a life insurance policy, you may or may not have come across the term 'underwriting'. Underwriting is essentially the process of assessing the level of risk that someone applying for life insurance presents to the insurer so they can ensure the cost of insuring the individual is proportionate to their level of risk. This is similar to how a car insurance company will ask you if you have had any previous licence suspensions.

The underwriting process can determine things such as whether or not you can actually get life insurance with that company, how much you can be insured for, what sorts of exclusions will be applied to your policy, and how much you will have to pay. This article looks at underwriting in the life insurance industry with the aim of understanding it better.

How does the life insurance underwriting process work?

Underwriting is essentially the process of ascertaining the degree of risk a person presents in order to either accept or reject their life insurance application.

When you apply for life insurance cover from an insurance provider, you are basically asking them to cover you in case of an untimely death or permanent disability. This means that if you were to fall victim to sudden death, the insurance company would provide certain monetary benefits to your family so that their financial needs could be met.

When does underwriting occur?

Most life insurance companies will require underwriting. By comparison, many superannuation and workplace insurance schemes do not require underwriting unless the insured want's to increase their level of cover.

What documents are generally required?

As a minimum the insurer will require anApplication form and a personal statement with details of;

• Residency
• Occupation
• Financial status
• Pursuits or pastimes
• Medical history

What evidence is required from the insurer under personal details?

• Details of medical history
• Information of any diseases or health disorders
• General questions about the insureds medical history (to assess any chance of suffering a hereditary disease)

What risk factors impact the premium or whether the policy is accepted?

Not every person presents the same degree of risk to the insurance company. For instance, if you are 30 years old and are in good health, you would provide a significantly lower risk of suffering an early death than someone who is 60 years of age or in ill health. While there are no certainties in life and a younger person could die earlier than an older person, life insurance is based on calculable risk and that is exactly what underwriters do.

Hence, when you fill in your application form for life insurance, the application goes through an underwriter. The underwriter then checks various factors on your application, and on the basis of those factors your risk is determined. Here are some factors that underwriters typically look at:

• A person’s age: As far as life insurance cover is concerned, a person’s age is an important consideration. People who are in their thirties or even younger typically present lower risk than older people and may thus qualify for lower premium rates.
• Smoking Status: If the applicant is a smoker, premium rates can increase by 100%
• Genetic medical history: If you have a long history of serious illness such as cancer or heart problems in your family, then your risk may be assessed as high by the underwriters. On the other hand, if you are in good health and you do not have any genetic history or predisposition to serious illnesses, then your life insurance application should be accepted at standard premium rates.
• Current health conditions: If you are in good health you obviously stand to be assessed as a lower risk than someone who has some illness or who has undergone serious surgeries in the past. Sometimes, underwriters may even refuse your life insurance application if it indicates that you are regularly ill, as the insurance company may not be willing to accept the higher risk that comes with regular illness.
• The nature of your occupation: The nature of your occupation can also have a significant impact on your life insurance premiums. Generally speaking, people who have jobs such as office jobs are regarded as lower risk in terms of premature deaths. On the other hand, if you are in a job where you need to tackle dangerous or risky situations on a regular basis, your risk factor will be considered higher by the underwriters, which could cause your life insurance premiums to increase.

As the information above shows, the underwriting process may impact your ability to receive life insurance cover and will also determine the cost of the premiums you will be charged for the cover.

Not all insurers will require medical exams

If you don't want to go through a lengthy application process to buy life insurance, you may want to consider getting cover through a direct life insurance provider. Direct life insurance involves very little to no medical underwriting and your cover can be activated over the phone or online once your application has been approved. Direct life insurance is generally more suitable for applicants who have a clear understanding of what they require out of their cover and are in good health. Underwriting will be done in the event of a claim so it's crucial you answer you are clear of the policy conditions and answer the medical questionnaire accurately to ensure your claim is paid.

Direct insurers will provide the applicant with a series of questions related to their health at the time of application. If the applicant does not present any risk based on their response, cover can be put in place without having to undertake further medical underwriting.

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How does medical underwriting work?

When your application is assessed by an underwriter, you may be asked to complete a medical examination depending on the information that you have provided. Your medical history from your doctor or other medical professional cannot be obtained without your permission and any information gathered will be treated in confidence.

Some medical conditions that will generally prompt an insurance underwriter to request a medical report from your doctor and/or medical examination include:

Underwriting is not only an important process for the person who wants to buy life insurance, but it is also a vital process for the insurance company. If the underwriters do not do a good job and quote very high premiums, the insurance provider stands to lose out on a lot of business to their competitors who may have a better underwriting process. Similarly, if the underwriters undermine a person’s risk and quote lower premiums, the insurance company stands to lose a great deal of money by covering high-risk individuals at lower rates. Underwriting is therefore a vital task that affects both life insurance applicants and life insurance providers.