What is life insurance underwriting?

Insurance underwriting is the process where a highly trained personnel (an underwriter) who, on behalf of an insurance company, reviews information provided in your life insurance application to determine your eligibility for life insurance coverage. Underwriting is utilized by most insurance providers to also determine the appropriate premium you pay for the coverage. 

The underwriter assesses the risk associated with insuring an applicant's life. They use the reinsurer's manuals for guidance, with data and trends collected over many years from various populations for mortality and morbidity outcomes. Depending on the type of life insurance plan and amount of coverage applied for, your insurer will gather information to help them determine the risk of insuring your life, which helps them to decide whether to provide you with coverage or not as well the appropriate premium rate. 

The time required for underwriting to be completed could be anywhere from a few hours to a few days or even months. The underwriter reviews information provided on the application and assesses if it is sufficient to make an approval decision. Some of the factors that are evaluated to make a decision are discussed below.

In the case where the person whose life is insured is in good health and further information is not required, the application could be approved immediately on submission of the application, subject to age and coverage amount. If the underwriter requires further information to make a decision, then it will extend the underwriting period. Some examples of when more information may be needed are if the applicant has certain medical conditions, a high-risk occupation or validating financial information for applied coverage amounts that are greater than what may be appropriate based on an insurance needs analysis. In these cases, it will take more time to gather additional details

While every insurance provider has their own criteria when it comes to the underwriting process depending on the specific life insurance plan, below, is a list of some factors assessed by an underwriter to make a decision:

• Age: The older you are, the higher premiums you are likely to pay for a life insurance plan. As we age, the more we are susceptible to health risks.
• Sex: Statistically, women live longer than men, so at the same age and health status, women may pay less for the same coverage.
• Health history: Being diagnosed with certain illnesses may result in higher premiums or not qualifying for life insurance coverage. Also, other medical metrics like BMI (body mass index), blood pressure, cholesterol, diabetes and such can affect your premium rates.
• Family medical history: Insurers might also ask if there were any cases of serious illnesses in your family for example, stroke or cancer.
• Smoking or tobacco use: Actuarial tables indicate that smoking or tobacco use reduces your life expectancy. This increases the risk of insuring a person hence means higher premiums.
• Alcohol or drug use: If there is a history of above average consumption of alcohol and drug use, an underwriter may assess this as a higher risk. This could lead to a higher premium or a decline of the application.
• Occupation and hobbies: If your occupation involves working in hazardous conditions, the risk to insure you increases. The same applies for risky hobbies like bungee jumping or scuba diving. This can either lead to a higher premium or a decline.
• Financials: The underwriter will generally make sure your net worth (including your income, assets and debts, occupation and industry and existing policies) to ensure the coverage amount applied for is appropriate and if you can pay the premiums without any financial strain.
• Existing policies: Underwriters might also check for other existing life insurance policies to ensure a person isn't applying for too much coverage.

There are quite a few possible outcomes for an application, depending on whether an applicant meets the underwriting requirements of the insurer based on the above factors.

• Approval: Based on the underwriter's assessment of all the information gathered, if you meet the underwriting requirements as outlined in the reinsurer's manual, your application will be approved. You can be approved as standard or with a rating.
  • Approved as Standard: If all the information gathered is assessed as within the parameters of what is an expected risk based on the factors reviewed, you will be approved with standard premiums.
  • Approved with a Rating: Your insurer may decide, based on the underwriting assessment, that your coverage would present a higher risk for an insurance company than what is standard. In this case, they may offer coverage for a higher premium amount for the plan to reflect the risk profile. A few examples of when this may happen include applying for a coverage amount greater than what you reasonably require, or having vital statistics that are over the accepted standard limits, for example high body mass index.
• Declined: In the case of a decline, the underwriter has assessed that the risk of providing you with a life insurance policy is more than what the insurer would be willing to undertake. This can be due to factors like a high-risk occupation, lifestyle or certain health conditions.
• Postponement: At some point in the underwriting process, the underwriter may deem your application to be a higher risk that can be reviewed again at a later time. While this doesn't always mean bad news, it means the insurer is unable to provide coverage at the time of your application. This can happen when the assessment results may change within a period of time. This could be related to health and includes pending tests, blood alcohol levels, high cholesterol or some medical condition that isn't accepted by the insurer at that time but can be re-considered later if there are health improvements.