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Life Insurance Underwriting: Understanding the Process and Its Importance (2024)
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Via Secure Partner PolicyGenius
Updated:
Apr 13, 2024
Written by
Drew Gurley
Drew Gurley
Edited by
Sabrina Lopez
Sabrina Lopez
Life insurance underwriting is the process of providing an insurer with the information it needs to determine your risk profile so that a company can provide you with a term life or whole life policy that is accurately priced based on your unique situation.
Insurers will gather information from you and through your medical records. An application will request that you sign a HIPAA-compliant consent form giving access to pharmaceutical databases, motor vehicle reports, public records and financial statements (especially if you want a high dollar policy). While the underwriting process is essentially the same across providers, each one calculates risk differently, so it’s a good idea to get multiple quotes to find the best life insurance policy.
What Is Life Insurance Underwriting?
Underwriting is a process that every life insurance policy applicant must go through. It is the process the insurer uses to study a wide range of individual risk factors with an ultimate goal of assigning an overall risk assessment to the applicant. From this assessment an insurer will determine what kind of coverage — and in what amount — an applicant qualifies for and what their life insurance premiums will be.
Traditionally underwritten policies include a health questionnaire from the applicant and a detailed medical exam. Accelerated underwriting allows you to get life insurance with no medical exam; however, policies of this kind are more expensive and have lower death benefit limits for your loved ones. Accelerated underwriting incorporates tools and techniques that predict relative mortality on various behaviors.
Underwriting can be completed in as little as 24 hours or may take up to six weeks, depending on the complexities of each application.
The Life Insurance Underwriting Process
Every insurer has its own unique components to its underwriting process, but overall, the process is similar for most companies. Here is how the process works:
- Review your application.
- Determine if the insurance company should cover you.
- Recommend the type of policy and conditions the insurance company should offer you.
- Look for solutions that could reduce the frequency of future claims.
- Negotiate with agents or brokers to find ways to cover you if there are any issues with your application.
- Assess your background if you’ve made multiple claims, had trouble making payments or if there are other similar red flags.
Application and Documentation
To save time and avoid delays, gather the essential information and documentation before you begin filling out your application. Here is what you will need:
- Copy of your driver’s license or other photo ID
- List of prescriptions with dosage amounts
- Names of doctors you’ve seen in the past five years
- Description and dates of any surgeries you’ve had in recent years
Risk Assessment and Underwriting Guidelines
The premium you pay will normally depend on risk and underwriting factors, including:
- Age: Younger policyholders statistically live longer, creating a longer window to pay into their policies. That means less risk to insurers, which results in lower premium costs.
- Health status and medical history: Before you’re issued a policy, you may be required to take a medical exam. If you have a health history that includes conditions such as cancer, diabetes, heart disease or a multi-generational history of severe illness or hereditary disease, you’ll pay more for coverage.
- Occupation: If you’re in a high-risk career, such as a firefighter, pilot, police officer or in some construction trades, expect to pay more for a policy.
- Gender: Life insurance premiums are lower for females because their life expectancy is longer.
- Lifestyle: If you engage in dangerous hobbies such as mountain climbing or skydiving, or if you’re a heavy drinker or smoker, you may see that reflected in higher premiums.
- Policy type: In most cases, term life insurance is the most affordable.
- Coverage amount: The higher the coverage, the more you’ll pay in premiums.
- Credit standing: Some states let insurers factor in a credit-based and credit history insurance score when determining premiums.
Medical Underwriting and Underwriting Classes
Insurance companies typically use super preferred, preferred and standard risk classifications. The criteria for each class are similar from company to company. If applicants don’t meet the criteria for these classes, they might be classified as substandard and could be denied coverage completely.
Super Preferred Risk Class: Someone in the super preferred class is in excellent overall health, doesn’t engage in risky hobbies or does not have a dangerous occupation. You can’t have a history of tobacco use in the past five years or drug use or alcohol abuse in the past 10 years, nor can you have a history of cancer or heart disease. Depending on the insurer, you also can’t have a parent who died from cancer or cardiovascular disease before age 60 or sometimes 65.
Preferred Risk Class: The preferred risk class has a similar profile as someone in super preferred. However, they might be taking medication to treat certain medical conditions, be slightly overweight or have identified risks in their family medical history but are still generally in good health overall. You can qualify for this class if you have well-managed diabetes and, in some cases, anxiety and depression that are being managed.
Standard Risk Class. Most people fall into this class. People will have more potential health issues, higher obesity or take medications for several health issues. Your driving record doesn’t have to be perfect, and this classification also is more lenient when it comes to smoking. You must be tobacco-free for a year, and some insurers will allow marijuana use.
A substandard rating system is used for those who have significant health conditions or only a short track record of managing a health condition. Underwriters will look for alcohol abuse or treatment, severe asthma, bi-polar disorder, epilepsy, multiple sclerosis and Type 1 diabetes, among others.
Underwriting Tools and Technology
Underwriters are using tools and technology to determine the most accurate ratings for life insurance applicants. This includes various risk factors such as cigarette and alcohol consumption, workplace dangers, medical test results, body mass index (BMI) and others.
Each variable is related to the probability of cost to the insurance company. To accurately calculate each one, insurers use models featuring advanced computations that reliably predict losses by analyzing historical data.
Underwriting Decisions and Policy Terms
Underwriting can take as little as 24 hours but could take up to six weeks. The process is more detailed on higher limits and other factors that require more time to analyze.
As part of the process, an underwriter will review the details of your application and the results of your health exam, then use this data against certain models to assess your life expectancy and determine your life insurance risk class and classification. All of these pieces of information will ultimately determine the amount of coverage allowable and the monthly premium.
Impact of Underwriting on Life Insurance Policies
The better your rating, the lower your insurance premium will be. The “standard” rating is the baseline, and rates drop with each class above standard.
Typically, with a substandard rating, your premium will cost 25% more than the premium for the standard class. Substandard ratings are based on an insurer’s table, which assigns risk based on various factors. An A or a 1 table rating is the best possible, but as the table ratings go up (B, C, D, 2, 3, 4, etc.), so do rates.
Common Misconceptions About Life Insurance Underwriting
There are several common myths about life insurance underwriting.
Myth: A medical exam is always required for life insurance coverage. That’s not the case. Accelerated underwriting skips medical exams, but you will probably pay more for the privilege.
Guaranteed issue and simplified issue life insurance policies do not typically require a physical but will ask questions about your medical history and health information.
Myth: Underwriting takes a long time. Not necessarily. In some cases, you can be approved in as little as 15 minutes. The underwriting process takes several weeks in other cases based on the amount and complexity of the type of policy you are applying for.
Myth: I can fudge on my application to get a better policy and rate. The best advice is: don’t do it. If you get caught, your coverage could be canceled, and if you die and it’s later determined you omitted or lied about certain things, the death benefit claim could be contested or denied.
Myth: A pre-existing condition will make me ineligible for life insurance. Not necessarily. Insurers have several contingencies for people with various risk factors such as heart disease, high blood pressure, high cholesterol, diabetes and more. An underwriter will determine those pre-existing conditions, how they impact your ability to get a policy and what you’ll pay.
Myth: Risky hobbies or types of employment will prevent you from getting coverage. The same standard applies to hobbies and employment as other pre-existing conditions. As part of the underwriting process you will likely be asked about your job risks, lifestyle habits and hobbies, safety precautions and how often you participate in these activities. Many companies will still approve you for coverage, but these factors may increase your monthly premium.
The Bottom Line
Underwriting is a crucial part of the life insurance application process. You will get the appropriate coverage for your unique situation based on risk factors, actuarial tables and insurance industry ratings.
Being honest and thorough is critical when working with an insurer and underwriter. Your policy could be canceled if you lie and the insurance carrier discovers this later. The incident could get logged into the Medical Information Bureau, which means other life insurers can see the incident if you apply for coverage in the future. We recommend getting several life insurance quotes to make sure you get the best term life insurance or whole life insurance policy.
Frequently Asked Questions About Life Insurance Underwriting
Insurance underwriting decisions are not necessarily final. If you don’t like the outcome of your underwriting process, you may be able to provide the insurer with more information to substantiate why you are a better risk than first indicated. Speak with an agent to determine the appeal process.
No, an agent is not the same as an underwriter. A life insurance underwriter is trained specifically in assessing risk. An insurance agent will help you determine how much life insurance coverage you need and what kind of policy is best for you. The agent will also help you with your application process and submit your application to the life insurance company underwriting department for review.
If you’re a high-risk applicant, you may still be able to get life insurance. People with health challenges may face more of an uphill battle for coverage through traditional means. To address this, many companies offer no-exam policies that require only the completion of a health questionnaire. The trade-off is that these simplified issue policies often have lower coverage maximums and higher premiums.
If you’re working, you may be able to get group coverage through a labor organization or an employer-sponsored life insurance plan. These plans usually have affordable group rates and may not require medical exams for lower-limit policies.
Traditional underwriting involves completing a life insurance application and a health exam that may include collecting a blood test or urine sample. Accelerated underwriting streamlines the process by eliminating the exam and collection of blood or urine samples. Instead, it uses algorithms and mortality modeling to determine the applicant’s risk profile.
Methodology: Our System for Ranking the Best Life Insurance Companies
Our goal at the Guides Home Team is to provide you with comprehensive, unbiased recommendations you can trust. To rate and rank life insurance companies, we created a thorough methodology and analyzed each company by combing through online policy information, speaking to agents via phone, reading customer reviews for insight into the typical customer experience, and reviewing third-party financial reliability scores.
After collecting this data, we scored each company in the following categories: coverage, riders, availability and ease of use and brand trust. To learn more, read our full life insurance methodology for reviewing and scoring providers.
