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  1. Insurance
  2. Life Insurance

How Does Life Insurance Underwriting Work?

By:
Jennifer Nelms
14 min read

Life insurance underwriting is a standard step insurance companies take when assessing life insurance applications. Insurance companies use this process to determine if they'll issue policies to applicants, the coverage amount and policy costs. Life insurance underwriting is a safety measure that helps insurers manage their levels of risk.

Continue reading to learn more about what the underwriting process entails with life insurance policies.

What is life insurance underwriting?

Life insurance underwriting is a process in which insurance companies calculate the risk level of insuring a potential customer before approving a life insurance policy. Acquiring an individual or joint life insurance policy begins with an application and requires choosing a type of life insurance.

If you're new to life insurance, read our guide on life insurance for beginners to learn more about how life insurance policies work and how to choose the right type for you.

After you submit the application to the insurance company, it assesses the information and ultimately decides whether or not to issue a policy. Most insurance companies base this decision on the information discovered on the application and in their subsequent research during the underwriting process, during which time underwriters consider numerous factors including:

Additionally, most companies perform searches via the Medical Information Bureau (MIB). This database contains coded medical reports for people who apply for life insurance, and it’s widely used for underwriting screenings. The codes correlate to things such as health problems, driving records and lifestyle habits. Companies also use this database to make decisions about other insurance products, including long-term care and health insurance policies.

The process of life insurance underwriting may also require a medical exam of the prospective policyholder to qualify their candidacy. While you can sometimes buy life insurance without medical exams or underwriting, this is usually only an option with group life insurance policies.

The importance of underwriting in the life insurance industry

The primary purpose of underwriting is to help insurers mitigate their risks. Since life insurance companies only pay out death benefits when policyholders die, they aim to use information during the underwriting process to determine applicants’ likely life expectancies. Assessing your likely lifespan tells the company your risk level, which allows the insurer to charge higher rates for at-risk individuals or outright deny them policies if they’re deemed to carry too much risk.

How life insurance underwriting works

Underwriting life insurance policies is a process that requires multiple steps. The insurance company spends time researching numerous aspects of your life during the process. The following section details those steps.

The initial life insurance application

Most life insurance companies use detailed applications that ask numerous questions, starting with basic personal facts. You must list your name, date of birth, address and Social Security number. Sample life insurance applications allow you to learn what to expect when applying for a policy.

Medical history and current health status

The life insurance application will include a section relating to your health and medical history. You must list any current medical conditions and medications you’ve been prescribed. The application also asks about family history. For example, it might ask if your parents are alive, and if not, when they died and from what causes.

Most applications also include a list of health issues, requiring that you check any boxes that apply to your health status and history. Your responses — which you’re legally required to answer truthfully in order to avoid potential insurance fraud charges — help underwriters determine your level of risk.

Lifestyle, habits and hobbies

Life insurance companies also factor in applicants’ lifestyles, habits and hobbies. The foremost example of this is inquiries about tobacco use. Using tobacco is considered a lifestyle choice, and you must state on the application whether or not you’re a smoker or use other tobacco products.

Insurance providers also consider alcohol use as well as dangerous hobbies and interests, such as bungee jumping and skydiving, in making their determinations. Additionally, insurers could ask about your driving habits, criminal past and credit history, all of which could ultimately factor into their decisions.

Financial information and life insurance coverage needs

Life insurance applications include questions about your finances and life insurance coverage needs, including queries about your income, occupation and financial wellbeing. The companies want to ensure that you have enough coverage to provide your family with the same lifestyle after you die, and they also want to establish that you'll be able to afford the policy’s premiums.

However, they also want to avoid over-insuring policyholders. This is why some life insurance companies use an income multiplier to determine how much insurance to offer. The multiplier varies by company, but many experts suggest buying a plan 20 times your current income before taxes (e.g., aim for a policy with death benefits of $1,000,000 if you earn $50,000 a year).

As people age, they might require less coverage due to changes in their financial statuses. For instance, you may need less coverage if you paid off your mortgage and have a healthy amount of savings in the bank.

Life insurance underwriting guidelines

Insurance companies must follow underwriting guidelines for life insurance policies — including compliance with the Fair Credit Reporting Act — when making decisions on applicants. Insurers must also obtain permission from an applicant before performing the underwriting process. If a company discovers adverse information and declines to issue a policy, it must notify the applicant in writing regarding the information and why it declined to offer a policy.

These rules protect individuals who apply for life insurance by creating guidelines and regulations for insurance companies in order to help them avoid discrimination during the underwriting process.

Medical underwriting

Insurance companies assess your current health and health history to determine your life expectancy. To do so, they scrutinize your application and may inquire with the MIB to see if the database contains a file for you. Some insurance companies also require a medical exam prior to issuing you a policy to learn if you have any preexisting conditions and if you’re currently in good health, thereby giving the insurance company confidence that you've honestly answered the application questions.

Financial underwriting

Financial underwriting in life insurance provides the insurance company with information about your personal finances. Similar to how mortgage underwriting qualifies applicants for home loans, financial underwriting helps the insurer determine if you qualify for life insurance from a budgetary perspective. This helps establish whether or not you’ll be able to pay for the policy, as well as how much you’ll need based on your income and costs of living.

Lifestyle underwriting

As part of the underwriting process, insurance companies also assess lifestyle choices and habits, as they also factor into applicants’ lifespans. For example, insurers need to know your current and previous tobacco usage, as tobacco use has adverse health impacts and decreases users’ lifespans. Occupations also affect health, which in turn affects life expectancy. For example, construction workers, firefighters and truck drivers fall into the high-risk occupation category, whereas vocations like accountants, actuaries and medical records technicians are considered low risk.

Assessment of risky behaviors

Insurance companies also consider your risky behaviors due to the adverse effects they may have on your life expectancy since people who partake in high-risk activities have a higher chance of premature death. Examples of these activities include bungee jumping, skydiving and reckless driving. Insurers can review applicants’ driving records to learn about their driving habits. A person with a history of speeding tickets or DUI charges is a higher risk than someone with a clean record.

Using actuarial tables and mortality tables

Actuarial tables (also called life expectancy tables and mortality tables) are tools insurance companies use to calculate deaths and risks when issuing life insurance policies. These tables show a person's risk of dying at a certain age based on their current age and gender. Using actuarial tables helps insurers predict the life expectancy of applicants.

Insurance companies might also use a build table (also called body mass index table) to assess applicants’ potential life expectancies by examining heights and weights to determine body mass index (BMI). According to studies, higher BMIs increase the likelihood of developing heart disease, diabetes and numerous other health problems. As a result, people with higher BMIs tend to have shorter life expectancies.

Life insurance underwriting decisions

After completing the underwriting process, a life insurance company must decide a few things:

The underwriting process provides insurance companies with the information they need to make these decisions. The following section discusses these determinations.

Determining insurability

Before issuing an applicant an underwritten policy, the insurance company must determine that individual meets the requirements and appropriate risk level to receive a policy. The insurer can deny offering the policy if it determines the risk level is too high.

Setting life insurance premium rates

Next, the company must calculate the life insurance rates. It bases the rates on applicants’ desired types of life insurance, the coverage amounts and the associated risks. Based on mortality rates, insurance companies face much lower risks when insuring younger people and those without preexisting health conditions. As a result, you'll save money on your rates by purchasing a plan at a younger age. Conversely, waiting too long results in higher rates and might present challenges in finding a company that agrees to provide a policy.

How does underwriting differ between group life insurance and individual life insurance?

Buying life insurance without underwriting is challenging as it’s uncommon for companies to offer policies without it. However, group life insurance is different. In many cases, you can get life insurance without underwriting through a group plan, which is typically offered by an employer as a benefit. The primary qualification for obtaining coverage is working for that employer, not policyholders’ health.

If an employer offers a group life insurance plan, employees must fill out basic forms, but the insurance company won't perform rigorous research on each person as they would for individual life insurance policies. Therefore, virtually no underwriting is required for opting into a group plan.

The downsides to group plans are the coverage amounts and terms. Most group plans only provide limited coverage, which might not be enough to cover the needs of beneficiaries after the death of the policyholder. Some group plans let you add more coverage. However, if you do this, you could be subject to the underwriting process before being approved. If you can't increase your group plan coverage, you could look for the best life insurance options to purchase a second plan.

Lastly, most group life insurance plans terminate within one month of employees leaving the company. Because of this, group life insurance is often viewed as a supplemental life insurance plan. In those instances, policyholders may want to secure a separate term or whole policy.

How long does life insurance underwriting take?

On average, the life insurance underwriting process takes 21 days but can routinely span 30 to 60 days. The process can be accomplished faster with accelerated underwriting, a newer approach that provides fully underwritten life insurance without health screenings. Accelerated underwriting uses algorithms and electronic information to research applicants' risks.

Summary of Money's how does life insurance underwriting work

Life insurance underwriting is an integral process companies use when issuing life insurance policies. It consists of a series of steps insurers perform to determine if they should offer applicants insurance, how much they should charge and what level of benefits to provide. The process informs the companies of applicants’ health statuses, risks and potential life expectancies. You can purchase life insurance without underwriting, but policies foregoing the process can be limited in their benefits. Most life insurance companies perform underwriting and factor in your health, lifestyle and finances before approving a policy and offering a quote.

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