What is Life Insurance Underwriting?

If you are like a lot of people, life insurance underwriting is not something you really understand. When it comes to purchasing life insurance, there are certain requirements that you have to meet in order to qualify for it. This is what is known as underwriting, where the rate that you will pay depends on what risk level you are.

Here is a good example of this: Let’s say that there are two people and one smokes while the other does not. Now the one who smokes is considered to have higher odds with a life expectancy that is shorter than the one who does not smoke. Thus, for the exact same amount and kind of coverage, the one who smokes is going to have to pay more; the premium amount is determined by how risky someone is.

There are several factors, with respect to the underwriting guidelines and standards, that a life insurance underwriter will look at. These include your medical history, job, current physical condition and health, personal habits, age, hobbies and gender – basically your life style. (A truck driver is more of a gamble than a librarian; smoking and drinking are high risks; jumping out of planes is a tad hazardous; being 60 and not 30 means you will pay more; and being a man usually means you will pay more.)

After the insurance company gets all this information from an applicant, an underwriter who has been specially trained will then review all of it, make an evaluation and come up with a risk profile of the applicant. Then, based on the chances of death and the risk profile, a final premium is given.

The life insurance underwriting standards for exactly what risks are considered insurable and acceptable are set by every insurer. Every application for life insurance is then reviewed to see if the applicant does indeed meet the underwriting standards. Four common categories are:

Standard – This rate is charged when you are considered as a typical or average risk.

Preferred – This rate is charged when you are considered as a better-than-average risk.

Rated – This rate is charged when you are considered as an above-average risk.

Declined – You may be turned down for coverage is you are considered uninsurable because of, for example, a very serious illness.

It is a fact that better than 91 percent of policies for life insurance are issued as applied for. If you happen to be declined or rated, this does not always have to be permanent. For example, by losing weight, quitting smoking and lowering your blood pressure and cholesterol, the possibility for your rating to change and your premium to get lower is there.

By realizing that there are a lot of different things that could affect your rates, you will not be surprised by the outcome you get. Remember, you can purchase a policy, and, if things have changed after one year, you can request a re-examination of your rate to see if it can be lowered.

For any kind of insurance, underwriting is going to be a part of the purchase. Think about it this way: When you buy a life insurance policy, you are basically asking that the company take the chance that you will live to the average life expectancy age for someone who is your age and gender. With a whole life insurance underwriting policy, if it turns out that you do indeed live that long, after your beneficiary gets the policy proceeds upon your death, the insurance company gets the remaining money for administering the policy and makes a profit.

The best thing to do is to get rates from 5 or 6 life insurance underwriting companies, compare them and then make a decision. Also, do not be in a hurry to get it.