What is Life Insurance Underwriting?

life insurance underwriting

In order to qualify for a life insurance insurance policy, be it a term or permanent policy, your policy will need to be underwritten. The process of underwriting is when the life insurance company reviews your application for a policy and either comes back with an offer or declines to insure.

The underwriting system is essential for life insurance companies to remain afloat. If they were to accept everyone who applied without reviewing their health, at the very least, no one would buy insurance until they were terminally ill and then would get a payout shortly thereafter.

Underwriting consists of a few major data points:

  • Health
  • Financial stability
  • Risk factors
  • Criminal background
  • Insurance history

Health

Probably the simplest factor to understand is the importance of health. Being that life insurance pays out if the insured dies, the insurance company wants to make sure that the applicant is most likely not going to be cashing out on their policy any time in the near future.

Term policies are priced relatively low due to this fact. Over 95 percent of term policies are never paid out due to people outliving the level term period. But even for a permanent policy, where the carrier knows that they will need to pay a death benefit at some point, the policies are priced so that the insurance will likely make a profit by holding onto the premium dollars and investing them over time prior to that fateful day.

That does not mean that if someone has a health issue they will be unable to qualify for a life insurance policy. On the contrary, most health conditions are covered, with only the most severe cases being declined. What it does mean is that the premiums will likely be higher than a healthier person of the same age and gender who is applying for a similar amount and type of life insurance.

Financial Stability

Life insurance companies invest a lot of money issuing policies for their clients. They have many administrative costs besides for the obvious benefit payouts. Therefore, an insurance company does not want to make that investment for a client who will more than likely not complete the payments of their life insurance policy.

A client who has a considerable amount of bad debt, non-discharged bankruptcies, or liens may have trouble qualifying for a life insurance policy.

Risk Factors

Someone who has a riskier occupation or partakes in dangerous hobbies will understandably be considered a higher risk in regards to life insurance. For example, active military personnel, avid scuba divers, and rock climbers-—to name a few situations—may see increased premiums along with additional questions from the underwriting team.

Criminal background

People with relatively recent criminal activity propose more risk than your average individual due to their likely nature and financial reliability. This is particularly true when referencing violent crime. Someone who was convicted of assault may be convicted again. Or, next time, they could lose the squabble and end up in the morgue instead of prison. Not all crimes or situations are weighed equally, so it is important to speak to an insurance professional prior to applying. However, criminal history is not very difficult to uncover, so hiding it, instead of explaining it, on a life insurance application, can be detrimental.

Insurance history

Most life insurance companies share information via the Medical Information Bureau (MIB). There an insurance carrier can see how many times someone applied for life insurance, whether or not they were approved and any health ratings they may have received.

Life insurance is meant to replace income. As such, an individual can usually only be insured up to a certain income factor. If the insurance company sees that the insured applied for a few other policies, they may want to know what the outcome there was and whether or not those policies were or are going to be accepted.

If the same person applies for insurance from a bunch of companies it also is a bit fishy, as underwriting guidelines do not vary that much to require multiple applications. In general if you get a decent rating with a couple companies the rest will also issue you a policy with favorable terms.

By applying to many different companies at once, it looks like the applicant may be trying to pull a fast one, hoping one of the carriers does not notice the problems inherent in the application.

Underwriting processes

Once the life insurance company has all of the above information about the proposed insured, they must now review it and offer (or decline to offer) a policy to the applicant. Here is where in recent years technology has played a major role in speeding up the process.

It used to be that in order to qualify for just about any amount of life insurance, whether completely healthy or seriously ill, a blood test, urine sample, height, weight, blood pressure, and more were always required. This method still exists in what would be referred to as “full underwriting” and is used for older or more complicated cases.

However many people are now able to qualify for a policy without ever speaking to anyone or performing any labs or exams.

There are four general types of life insuranse underwritins-Infographic

Accelerated

Accelerated underwriting has no exam, and usually no need for medical records. Many companies now offer close to instant results for those clients who qualify. A word of caution: this is only an option for the healthiest of clients.

Accelerated underwriting is not guaranteed and when the insurance companies have any questions their first method of defense is to order an exam and medical records. After review, the policy may still be issued at the highest health rating.

This method does allow for the lowest possible rates, with the least pain, provided the qualifications are met.

Full

This method is often referred to as traditional underwriting. Depending on the amount of insurance the exact requirements will vary. However, as previously mentioned, the most basic ones are blood, urine, height, weight, blood pressure, and a health questionnaire. This process may be referred to as a “paramed” exam.

Guaranteed

Anyone who applied and is within the correct age limits, will qualify, no questions asked. Unlike the other underwriting methods discussed in this article, the insurance company is not worried about the health, financials, risks or insurance history of the individual applying for these policies. The only policies issued with this method are appropriately named “guaranteed whole life.” GWL is explained in depth in this article.

Simplified

This underwriting path is ideal for those individuals without a complicated medical record but who have high body mass index (BMI), credit, and other minor issues.

Similar to accelerated underwriting, there is no medical exam required. The exam is guaranteed to never be ordered. Rather, the life insurance companies will usually rely solely on a few reports such as the prescription and MIB report to issue these policies.

Understandably, the pricing is considerably higher than an accelerated or fully underwritten term policy. If the insured is willing to go through full underwriting and qualify for anything higher, this method is likely not in their best interest.

The type of insurance does not matter so much in regards to which underwriting method is available. For example, you can use accelerated underwriting to qualify for term, whole, and universal life insurance policies.

The various life insurance companies, however, do not necessarily offer acceleration or other types of underwriting. Take a look at this comparison of term life insurance companies.

Here is a chart showing which types of policies are available via which underwriting method:

 AccidentalAccidentalUniversal LifeTerm LifeWhole Life
Accelerated
Guaranteed
Full
Simplified

FAQs

  • What does accelerated mean in life insurance?

    The word “accelerated” in regards to life insurance can either be referring to the method of underwriting or accessing the policy benefits due to a terminal illness while the insured is still alive.

  • What is an accelerated payment option for insurance?

    Many life insurance companies will allow you to prepay your policy premiums and in return receive a discount.

  • What is accelerated underwriting in life insurance?

    A method of life insurance underwriting in which no exam is needed and the healthiest clients may be approved instantly for a policy.

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