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What is Life Insurance Underwriting?

Learn about Underwriting of Life Insurance

Underwriting life insurance is the process of examining, accepting, or rejecting life insurance risks, and classifying those selected, in order to charge the proper premium for each.

The purpose of underwriting is to spread the risk among a pool of insureds in a manner that is equitable for the insureds and profitable for the life insurance carrier.


What is Life Insurance?

Life insurance is the protection against the death of an individual in the form of payment to a beneficiary, usually a family member, business, or institution.

In exchange for a series of premium payments or a single premium payment, upon the death of an insured person, the face value (and any additional coverage attached to a policy) minus outstanding policy loans and interest, is paid to the beneficiary of the life insurance policy.


What is an Underwriter for Life Insurance? 

A life insurance underwriter is an individual who works in the office of an insurance company and performs the function of underwriting risks to determine if an applicant for life insurance is insurable at standard rates, substandard rates, insurable at preferred rates, or is uninsurable and denied life insurance by the insurer.


Risk Selection for Life Insurance

Underwriting Factors:  Life Insurance factors on the application that must be evaluated in order to complete the underwriting process include:

  • Age
  • Gender
  • Physical Condition
  • Personal Health History
  • Financial Condition
  • Use of Alcohol, Drugs, or Tobacco
  • Occupation
  • Hobbies
  • If in The Military
  • Driving Record


Underwriting Gain or Loss

The profit or deficit that remains after paying claims and expenses.

Life Insurers generate profits from underwriting and from investment income. Their chief business is insuring against risks for a profit, and one measure of success is whether there is money left after paying claims and expenses. This amount, if any, is their underwriting gain.


Life Insurance Underwriting Practices

Underwriting practices are aimed at developing a profitable and growing book of business for the life insurance company.

To accomplish this goal, life insurance underwriters attempt to provide coverage for a group of insureds whose expected mortality rate is lower than the expected mortality rate of the population as a whole. 

If it is successful in its underwriting efforts, the insurance company will avoid the consequences of adverse selection and achieve an average or better spread of exposures on the lives of its insureds.


Underwriting Factors for Individual Life Insurance Coverage 

Individual life insurance is priced on a class basis. 

Prospective insureds are classed on the basis of a number of factors that insurer experience has shown to predict expected mortality rates.

The principal rating factors are age, gender, health, and occupation.


Age – Mortality rates, often expressed in terms of deaths per 1,000 persons, increase with age. For this reason, the cost of purchasing a life insurance policy increases as a person’s age increases. The older you are when you buy life insurance, the higher your annual premium.

Gender – On average, women in the United States live longer than men. Therefore, all other things being equal, the cost of life insurance for a woman is lower than for a man of the same age.

Health – An applicant’s personal health, and the health history of his or her family help indicate to a life insurance underwriter whether the applicant presents an average or better than average "risk" for the insurer. In evaluating an individual’s health, life insurers consider whether the applicant or family members have had illnesses such as cancer, heart disease, hypertension, or diabetes. On average, persons with a health history including these diseases are likely to have a higher than normal mortality rate. 

In assessing an individual’s current health, life insurers may use information supplied by the applicant as well as the applicant’s physician and hospital records. The applicant may also be asked to take a medical examination that includes blood and urine tests and an electrocardiogram (EKG). Because of the link between smoking and heart disease, most insurers offer lower rates for non-smokers. The medical exam is paid for by the insurance company.

Occupation and Hobbies – Some occupations are more hazardous than others. Likewise, some hobbies such as flying and scuba diving are more dangerous than others. On average, applicants with hazardous occupations or hobbies are likely to have a higher than normal mortality rate.

Personal Lifestyle – When a large amount of life insurance coverage is requested, life insurers frequently investigate the personal circumstances of the applicant’s life. Such an investigation might seek information on potential problem areas such as alcohol or drug use, poor driving record, or financial troubles.

Foreign Travel or Recent Immigration – Persons who have traveled or reside outside of the United States shortly before applying for life insurance coverage may have been exposed to diseases not commonly found in this country. Also, mortality rates may be different in other countries. A life insurer may require special medical tests or a postponement of coverage for such persons.


Underwriting Actions for Life Insurance

On the basis of information provided by the applicant and the other sources noted above, life insurance underwriters take one of three actions.

First, the applicant may be rated "standard" and charged the normal premium for the desired coverage. More than 90 percent of life insurance applicants qualify for coverage on this basis.

Second, the applicant may be rated as "substandard" and charged a higher premium. About 4% of life insurance applicants are rated substandard. 

Finally, about 3% of life insurance applicants are declined because the chance of loss is too great to provide the requested coverage.

In addition to these three basic underwriting actions, many insurers also identify "preferred risks" for whom they will provide standard coverage at a reduced premium.

To be rated as a "preferred risk", an individual must be in excellent health and meet or exceed the insurer’s other underwriting criteria.

Most life insurers also classify nonsmokers as preferred risks for whom lower premiums are charged.

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