What is Life Insurance Underwriting?

UPDATED: Mar 26, 2020

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Life insurance underwriting is all about risk. More specifically, how much risk you represent to the life insurance company. In other words, if they were to issue you a life insurance policy, what are the chances you would die and your beneficiary(s) collect the death benefit?

Wikipedia defines underwriting this way:

Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage, or credit).

You may be familiar with underwriting if you’ve applied for a home mortgage, auto loan or even a student loan. The financial institutions you applied with performed underwriting on you, albeit a slightly different version.

Banks are mostly concerned with your financial status when you apply for a loan. They want to know if you have the means to pay them back. They also want to know if you have a good history of paying others back.

Life insurance companies also consider your financial status. However, they are far more concerned with your health and whether or not you’re likely to die during the life of your policy.

What Information do Life Insurance Companies Review?

All life insurance policies require some level of underwriting, depending on the product. The most common — and least expensive — type of life insurance is term life. And within the term life family of products, the least expensive is fully-underwritten. This means the company collects more information from you than they would for another type of life insurance like no medical exam term life.

This information allows the company to determine risk more effectively. In exchange for this information, the company can offer you lower rates, assuming you are healthy, of course. Without this information, the company would have to charge all policy owners more, because they would have to assume a worst-case scenario.

Aside from your current health, life insurance companies want to know about your medical history, your family’s medical history, financial status, occupation, hobbies, driving record, tobacco/nicotine use, travel plans and more.

To gather the information they need, underwriters collect the following for every application:

  • Life insurance application
  • Health questionnaire
  • Paramedical exam
  • Motor Vehicle Report (MVR)
  • Medical Information Bureau Report (MIB)
  • Prescription medication history (Rx Report)

If you are older or applying for a high amount of life insurance, the underwriter may collect additional information such as:

  • Resting Electrocardiogram (ECG)
  • Financial questionnaire
  • Credit report
  • Inspection report
  • Physician’s exam
  • Cognitive testing

These additional requirements vary by company, by age and by amount of coverage. Here are a few examples.

Age 38, $1,000,000 term life policy for 20 years

  • Application
  • Paramed exam
  • MVR
  • MIB
  • Rx Report

Age 48, $1,000,000 term life policy for 20 years

  • All of the above
  • Resting ECG

Age 58, $2,000,000 term life policy for 20 years

  • All of the above
  • Inspection report
  • Financial questionnaire

The Paramed Exam: The Common Denominator

The paramed exam is required for nearly all fully underwritten term life policies. An exam company such as Superior Mobile Medics or Exam One completes the exam on behalf of the underwriter. The life insurance company pays for the exam.

The basic information collected during the exam includes:

  • Health questionnaire
  • Height/weight
  • Body measurements
  • Resting heart rate
  • Blood pressure readings
  • Blood sample
  • Urine sample

The examiner may also obtain other required information such as resting ECG’s or other tests. It’s this information that allows the underwriter to know your current health status. This can also be beneficial to you, as you can request a copy of the lab results from your exam. We’ve seen many people discover something in these exam results that they were not aware of, allowing them to seek treatment for potentially dangerous medical conditions.

The Underwriting Decision

So now what? The life insurance company has gathered all of this information about you, and you’re left wondering if you measure up to their standards. It can be frustrating, we know. But know this: 95% of our applicants qualify for coverage. How much will you pay? Well, that’s the million-dollar question.

The underwriter will take your information and compare it with the company’s underwriting guidelines. This comparison allows the underwriter to place you in a group of people with similar risk characteristics. Not every person in the group will have the same mortality, but overall the group will have a relatively predictable life expectancy. This group is known as a rating class.

Your rating class provides the company the basis for determining how much you will pay for your policy. The lower the risk, the lower the cost to you. The lowest rates are reserved for the preferred rating classes. The higher risk classes, such as standard and substandard, carry a higher cost.

Now, Get to Saving

To get the lowest cost on your term life insurance policy, you only need two things. The first is a good understanding of how underwriting works. Since you’ve arrived at this point, you’ve got that part down.

Second, you need to have an open discussion with your agent or the company representative who is taking your application. Let them know what potential obstacles exist. Be open. Don’t hide a thing. Let your professional work with what you’ve got to find the company whose underwriting guidelines best fit your situation. That’s truly how you save money on term life insurance.

Tim Bain

Tim is a licensed life insurance agent with 23 years of experience helping people protect their families and businesses with term life insurance. He writes and creates stuff for QuickQuote and other insurance and financial websites. You can find him on Twitter.

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