Life Underwriting

When you submit an application for term insurance to an insurance company, the company underwrites your application. This means that it will look at the information provided by you (and obtain information from other sources, if necessary) in order to assess the risks associated with you as an individual. Based on the results of underwriting, the insurer will decide whether or not to sell you a term insurance policy.

It's not simply a matter of accepting or rejecting your application, though. Assuming the company deems you insurable, it will place you in a pool with other applicants who share similar characteristics and pose a similar degree of risk. This risk classification determines the premium you will pay for term coverage.

How do insurance companies classify term insurance applicants?
When you apply for term insurance, you will be classified into one of the following four general risk groups: standard, preferred, substandard, or uninsurable.

Standard risks: These are individuals who, according to the insurance company's underwriting standards, are entitled to term insurance without having to pay a rating surcharge or be subjected to policy restrictions.

Preferred risks: This group includes individuals whose mortality experience (i.e., life expectancy) as a group is expected to be above average and to whom the company offers a lower than standard rate. The most common preferred class today is nonsmokers, for whom many insurers now offer a favorable rate.

Substandard risks: These are individuals who, because of their health and/or other factors, cannot be expected (on average) to live as long as people who are not subject to these risk factors. Substandard applicants are insurable, but only at higher than standard rates that reflect the added risk. Policies issued to substandard applicants are referred to as rated or extra risk policies.

Uninsurable: These are applicants to whom the company refuses to sell term insurance because they're unwilling to shoulder the risks. They've decided that the risk factors associated with the applicant are too great or too numerous. In other cases, the applicant's circumstances may be so rare or unique that the company has no basis to arrive at a suitable premium.

What factors go into the underwriting process?
An insurance company typically looks at a number of factors during the underwriting process in order to evaluate you in terms of risk. These factors enable the insurer to decide whether or not you are insurable and, if you are, to place you into the appropriate risk group. Some of the things considered are the potential insured's:

  • Age
  • Sex
  • Current health/physical condition
  • Personal health history
  • Family health history
  • Financial condition
  • Personal habits/character
  • Occupation
  • Hobbies

Where does the insurance company get its information?
An insurance company will gather information about you from several sources:

Your application: The basic source of underwriting information is your completed application for term insurance. The questions on the application are designed to give the insurer much of the information needed to make a decision. The company will then either reject your application, accept it and offer you insurance at a certain rate, or seek additional information.

Information from your agent: In many cases, the company places great weight on the recommendations of the insurance agent, particularly when the agent has a good track record with the company.

Information bureaus: The insurer may seek information on you from one of the cooperative information bureaus the insurance industry supports. The best known example is the Medical Information Bureau (MIB), which maintains centralized files on the physical condition of individuals who have applied for life insurance with member companies.

Physical examinations: In life insurance, one of the primary factors in assessing risk is your health. So it's no surprise that one of the most important sources of underwriting information is a physical exam. After examining you, a physician selected by the insurance company supplies the company with a detailed medical report. This report generally tells the company all they need to know about your present health.

What is the purpose of the underwriting process?
In a nutshell, the purpose of term insurance underwriting is to spread risk among a pool of insureds in a manner that is both fair to you and the insurer. Like all other businesses, insurance companies need to make a profit. Therefore, it doesn't make sense for them to sell term insurance to everyone who applies for it. Although they don't want to make you pay an excessively high rate, it's not wise for them to charge all their policyholders the same premium. Underwriting enables the company to charge applicants premiums that are commensurate with their level of risk.

When my term policy expires, will I have to go through the underwriting process again?
It depends. Some term policies have a clause that allows you to automatically renew the policy when it expires without having to resubmit to the underwriting process. This means that the company has to renew the policy at the same premium rate, even if your risk factors have changed (e.g., your health has declined) since the company sold you the original policy.

If your policy doesn't contain this provision, you will have to reapply for term insurance when your policy runs out and undergo what is known as postselection underwriting. At this time, the company has the right to deny continued coverage. Even if they don't deny you insurance, it's likely they will at least put you in a higher risk group and raise your premium based on your increased age.