Asset Data: Life Insurance Underwriting's Future?

Life insurance is a financial tool that provides financial stability to an individual's family and beneficiaries after they pass away. The process of underwriting in life insurance involves assessing an applicant's health, financial status, family health history, and lifestyle to decide if they are insurable and at what premium rate. While the primary goal of life insurance is to provide financial stability for beneficiaries, certain types of life insurance policies can be considered an asset. This is because some policies have a cash value component, which is considered an asset as the policyholder can access it while they are alive. This is in contrast to term life insurance, which does not accumulate cash value and thus is not considered an asset.

Medical underwriting

However, not all life insurance policies require a medical exam. No-medical-exam policies tend to appeal to those with serious health conditions or those who want to speed up the application process. Even without a medical exam, most companies will ask applicants to fill out a health questionnaire.

No-medical-exam policies are more limited than traditional policies. There is usually a cap on the coverage amount, and premiums are often higher because the insurer takes on more risk.

Some types of no-medical-exam life insurance include:

• Simplified Issue life insurance: The most common type, which usually involves a short health questionnaire.
• Guaranteed Issue life insurance: Offers limited coverage for a predictable premium.
• Accident protection insurance: Pays a lump sum to beneficiaries if the insured dies in an accident but does not cover death by natural causes.

Financial underwriting

During financial underwriting, insurance providers analyse an applicant's income, assets, debts, and expenses to gauge their financial stability and ability to pay premiums. This analysis also extends to credit history, including credit scores and reports, providing insights into financial responsibility and payment behaviour.

The occupation and industry of the applicant are considered, offering information about job stability and income potential. Additionally, the face amount or death benefit of the policy influences the extent of financial underwriting required, with higher coverage amounts prompting more comprehensive financial evaluations.

Insurers also scrutinise any existing life insurance policies held by the applicant to understand their overall insurance needs and potential financial strain. Financial ratios, such as debt-to-income ratios and liquidity ratios, are employed to assess the applicant's overall financial health.

While medical underwriting focuses on health-related factors, financial underwriting may consider certain financial implications of an applicant's medical history. For instance, a history of serious medical conditions could impact the applicant's economic well-being.

The financial underwriting process helps determine whether to approve an application, deny coverage, or offer a policy with modified terms, such as higher premiums for applicants presenting higher financial risk. It is imperative for applicants to provide accurate and honest financial information during this process, as any misrepresentation can lead to the denial of a claim if the policy is issued based on false data.

Risk assessment

The risk assessment process in life insurance underwriting can be divided into two main types: financial underwriting and medical underwriting.

Financial underwriting involves evaluating an applicant's financial status to ensure the amount of insurance they are purchasing aligns with their family's needs and their ability to pay premiums. Underwriters analyse income, debts, credit history, cash flow, and overall financial health to gauge the applicant's financial stability. This helps determine if the coverage amount is appropriate and if the applicant can afford the premiums.

Medical underwriting, on the other hand, focuses on evaluating the applicant's health and medical history to determine their insurability and the potential risk they pose to the insurer. Underwriters review medical records, conduct health exams, and consider any pre-existing conditions or family history. They also assess lifestyle factors such as smoking, alcohol consumption, occupation, driving record, and participation in risky hobbies.

The information gathered during the risk assessment phase is crucial for underwriters to make informed decisions. Based on their evaluation, they may approve the application, approve with modifications (such as higher premiums or specific exclusions), or reject the application if the risk is deemed too high.

The risk assessment process in life insurance underwriting aims to balance the needs of the applicant with the insurer's need to manage risk effectively. It ensures that insurance policies are priced fairly and sustainably while also providing the necessary coverage for the insured.

Decision-making

The decision-making process involves approving, modifying, or rejecting an insurance application. If the underwriter deems the risk acceptable, the insurance company will grant coverage to the applicant, typically at a rate corresponding to the risk level. The underwriter may also approve the application with modifications, such as increased premiums, deductibles, or coverage limitations. If the risk is deemed too high, the underwriter may deny coverage.

Underwriters use their expertise to balance the interests of both the insurer and the insured. They ensure that the insurance company can provide coverage while effectively managing its risk exposure. This decision-making process is based on established underwriting guidelines and actuarial mortality statistics.

Underwriters also have the responsibility to communicate their decisions and explain the policy terms clearly to the applicants. This transparency fosters trust between the insurer and policyholders and enhances customer satisfaction.

In summary, the decision-making process in underwriting involves a thorough assessment of the applicant's information, leading to informed choices about coverage options and terms. It is a vital step in ensuring that insurance policies are fair, appropriately priced, and sustainable.

Policy issuance

The outcome of the underwriting process will determine how the policy issuance step plays out. If the underwriter deems the risk acceptable, the insurance company will grant coverage to the applicant, typically at a rate that corresponds with the amount of risk. The applicant will then be offered the life insurance policy, which they can accept or reject.

If the underwriter finds that the risk or the chance of a claim is too high, the insurance company may deny coverage to the applicant. In some cases, the underwriter will provide coverage but with changes to the policy, such as increased premiums, deductibles, or coverage limitations. These changes will be presented to the applicant as a counteroffer, which they can choose to accept or reject.

It is important to note that the premium rate that an applicant will pay for their insurance policy is directly influenced by the underwriting process. By assessing the risk associated with insuring an individual, underwriters set premium rates that reflect the likelihood of a claim being made. Higher-risk applicants, such as those with pre-existing medical conditions or hazardous occupations, are typically charged higher life insurance premiums to compensate for the increased risk.

Frequently asked questions