Life insurance underwriting is the process by which life insurance companies determine a customer’s eligibility for a particular policy.
The business of life insurance is one of protection against risk. When you buy a life insurance policy, you are buying one with the idea that if some event results in your unfortunate death, your family is taken care of financially. In other words, you buy a policy because, in your opinion, the risk of leaving your family without a financial support system after your death is greater than the cost of paying premiums.
Similarly, an insurance company also insulates itself from the risks arising out of its day-to-day operations of issuing policies to its customers. Just as a life insurer fulfills the role of financial risk managers for you, reinsurers protect the financial risks of insurance companies. These reinsurers follow the guidelines for life insurers before issuing the policy to the customer. Essentially, the life insurer assesses the risk associated with each individual willing to purchase the policy and determines an appropriate premium rate to match that risk.
In short, underwriting is the process by which life insurance companies determine a customer’s eligibility for a particular policy. It is one of the most important aspects of issuing a life insurance policy as careful and accurate risk assessment enables life insurance companies to provide best-in-class service to their customers, innovate new solutions, issue policies to as many people as possible. Allows, and settles claims effectively.
Types of Underwriting
A life insurer assesses your policy eligibility by accounting for various factors such as age, income, occupation, lifestyle, underlying medical conditions, weight, body mass index, etc. Based on these parameters, companies generally classify underwriting into two broad categories –
The company considers your income, job, standard of living and your ability to pay premiums for the term of the policy to determine whether the life cover you wish to buy suits the needs of you and your dependents Or not.
Commonly referred to as the mortality estimation within the industry, this aspect of underwriting accounts for your propensity for underlying diseases based on your age, lifestyle, habits such as smoking, drinking, and your family history.
Financial underwriting is a process that insurers use to calculate the amount of life insurance that is appropriate for your situation. After you have expressed interest in buying life insurance for a certain amount, the insurance company will conduct a thorough analysis of your financial situation. At this stage you will have to provide various documents like salary slip, bank statement, telephone bill, electricity bill, passport, aadhar card, income tax return etc.
If you continue to have insurance policies already purchased under your name, you may need to provide details about them as well. While some customers may find this process intrusive, it allows the insurer to determine your exact risk appetite. You may have inadvertently reduced your life insurance requirements, which will result in you paying unnecessarily high premiums. Conversely, if you have been overly conservative in estimating your life insurance needs, the company can provide you with an even better value policy. Financial underwriting will help the insurer avoid any of these pitfalls and serve you better.
Medical Underwriting: Never hide anything from your doctor….and your life insurance provider
The importance of disclosing your medical history while buying a policy cannot be underestimated. This includes medications you take regularly, any hospitalizations you may have had in the past, upcoming minor or major surgeries, and pre-existing conditions.
When you apply for a life insurance policy, a representative from the company will call you to undergo a medical examination and/or collect samples. These tests are very important because they act as a snapshot of your health at that point in time. The results of the tests form the basis of all your dealings with the Company, from premium pricing to claim settlement.
All the above factors are taken into consideration while issuing the policy. If your medical tests reveal any discrepancy between your results and the information you have disclosed while applying for the policy, it can cause unnecessary delay in issuance and may even lead to rejection of your policy application. Furthermore, when you agree to the terms and conditions of a policy, it is assumed that you have been transparent about your medical history. This is termed as the principle of ‘extreme goodwill’. Intentional non-disclosure of important health information at the time of purchase may affect the claim settlement process.
Some buyers think that revealing pre-existing conditions will lead to them not being covered or a rise in premium payable. However, most insurance providers cover such ailments after a small waiting period. Hence, even though keeping things from your insurance provider might give you a sense of comfort for having avoided a slight increase in premium, it may prove much costlier if such nondisclosures are discovered at a later stage. Consequently, you will end up being exposed to the financial risk you had set out to cover for your loved ones.
It is advisable to be as comprehensive as possible while declaring your health status to your insurance provider. This will help the underwriting system to work in your favour by determining the fairest premium price, faster policy issuance, minimizing the risk of policy and/or claim rejection and maximizing your policy’s long term value proposition.