Part of being an adult is recognizing that you have a sense of responsibility toward others — especially your loved ones. If you were to pass away unexpectantly, you’d still want them to be cared for in your absence. That’s why you’ve thought ahead and decided to get life insurance.
Now that your decision is made, there are a few more things to consider. Do you want term or permanent life insurance? How much do you want to pay for a policy? What do you want the death benefit to be? After talking with your insurance agent, you’ll be ready to make these decisions and to move forward.
However, before you can check the “I’m insured” box, there’s another step in the process. And that’s underwriting — a process that many people applying for insurance don’t understand. That is, until now.
Read on to learn about the basics of underwriting and how it can affect you. Your newfound knowledge is sure to lead to a greater comfort level when going through the process.
Q: What is underwriting?
A: Underwriting is a process that every applicant who applies for insurance coverage needs to go through. It helps determine whether an applicant is insurable — and at what amount and at what cost to the applicant. It’s designed to provide the fairest price for a person’s risk profile.1
Your age, gender, current health (both physical and mental), medical history, occupation, hobbies, lifestyle habits, and more are all factors in determining a fair premium for your risk profile.
Mortality risk is most often associated with life insurance. An underwriter will look at “the increased likelihood for someone dying versus others of their gender and age group,” says Andy McCurdy, senior life underwriting consultant at Securian Financial.
For example, a 35-year-old woman who is a smoker and has a poor driving record is likely to pay more for her life insurance than a woman in the same age group who doesn’t smoke and obeys all the traffic laws. And a 45-year-old man who works as a computer analyst has a lower mortality risk than a man in the same age group who works as a deep sea fisherman.
Q: How does underwriting work?
A: There are two tracts available: full (or traditional) underwriting policies and accelerated underwriting policies. Both tracts require that the applicant provide personal information that includes their health and financial history, such as annual earnings. And both tracts will lead to the gathering of your prescription history and motor vehicle report.
The traditional tract will include a medical exam, one in which your height, weight, pulse, and blood pressure are checked. Samples of your blood and urine are collected.
The accelerated tract is more streamlined, meaning it allows you to skip medical exams and blood and urine tests. For example, accelerated underwriting incorporates tools and techniques (i.e., algorithms) that predict relative mortality on a variety of behaviors. However, to qualify, an applicant must be in good health and be no older than age 60.
Traditional underwriting takes about 45 to 60 days to complete and typically gives you the best price, if your general health is good. However, given the state of the world, many people are opting for the accelerated version so they can skip the clinic and home health visits.
Q: What do underwriters look for?
A: Underwriters want to be sure that the face amount makes sense and it’s an affordable premium. Also, underwriters will make sure the insurance product matches the client’s needs.
Family history and medical risks are also accounted for. Are you a tobacco user? How much alcohol do you consume? Do you use illicit drugs?
Underwriters trust that the client is giving them accurate information when filling out the 60-some question application.2 However, to be on the safe side, backstops are set in place — just in case. Along with providing supporting evidence for important questions like if a client has recently used tobacco, lab tests also provide valuable insight on a client’s current health status and can highlight potential issues with key organs like the liver, kidney, and heart.
“We start with that trust,” McCurdy says. “We trust the client is going to give us good information to make an accurate risk assessment decision. However, if there is conflicting or ambiguous information, the underwriter may ask more questions or order additional requirements to get the clarifying details necessary.”
It’s important that you be honest and as accurate as possible when answering all the questions. Applicants who are dishonest run the risk of voiding their policy down the road.
Insurers are able to gather intel on you through health records (your application will request that you sign a HIPAA-compliant consent form), pharmaceutical databases, motor vehicle reports, public records, and financial statements (especially if you want a life insurance policy for more than $5 million).
All this information-gathering enables you to get an accurate price on your coverage.
Q: How does medical history play into the underwriting decision?
A: In short, medical history plays a major role. But you don’t need to have a perfect medical record. In fact, most people don’t.
What if your medical history is less than ideal? Still apply for life insurance. Have high blood pressure? That does not mean you should wait to get insurance. High blood pressure can lead to other medical issues, such as a stroke or heart disease. And your premiums will only increase if that happens.
Yes, over time, you may be able to lower your blood pressure through diet, exercise or medication. But, until that happens, precious time passes by. You don’t want something happening to you and not be able to provide a financial safety net for your loved ones. Also, insurance premiums increase 3 to 5 percent each year that you grow older.1
The rating you receive is not stuck with you forever, notes McCurdy. Your risk factor can improve if your health improves. “There are opportunities in most situations for a client to come back and get reassessed,” he says.
One thing that’s currently unclear: the long-term effects of Covid-19. “As we learn more with this new disease, our underwriting guidelines will change,” says Michele Lee, senior life underwriting consultant at Securian Financial.
Q: What’s the difference between individual underwriting and group underwriting?
A: The underwriting for coverage you enroll in at work is typically a faster and less rigorous process than if you are buying coverage individually from another source.
Group insurance is typically obtained through an employer or entity such as a labor organization. With group insurance, you’re either approved or not approved. With individual insurance you can be approved at various rate classes: preferred select, preferred, standard, or substandard.
Q: What can a person do to streamline the underwriting process?
A: Whether you’re preparing for the accelerated or traditional underwriting process, gather your health information ahead of time so that you can give an accurate health summary.
Remember that the underwriting process is a step to having a life insurance policy that works for everyone.