Changing Coverage While Life Insurance Is Underwriting

Life insurance underwriting is the process of evaluating an individual's application for life insurance coverage. It involves assessing the applicant's risk profile, including their health, lifestyle, and financial situation, to determine their eligibility for coverage and the premium they will be charged. The process typically takes around four to six weeks but can be longer for more comprehensive policies or if additional information is required. Underwriting can be divided into two main types: financial underwriting, which focuses on the applicant's financial situation, and medical underwriting, which evaluates the applicant's health and lifestyle. The underwriter's goal is to ensure that the policy provides appropriate coverage for the applicant's needs and that the premium reflects the level of risk accurately.

Medical underwriting

During the medical underwriting process, insurance companies will request a wide range of data, including personal information (gender, age, occupation, lifestyle, hobbies, motor vehicle report), individual and family medical history, current health conditions, smoking habits, financial information, and more.

Based on the risk assessment, the insurance company will either approve or reject the applicant for coverage. If approved, the insurance company will determine the amount of coverage and the premium cost. The more risk the insurance company assumes, the more expensive the policy will be. For example, a 50-year-old smoker with medical issues will likely pay higher premiums than a 30-year-old non-smoker in good health.

The medical underwriting process can take up to six weeks to complete, but if the applicant is eligible for accelerated underwriting, their application could be reviewed the same day they apply.

In recent years, regulations have limited the use of medical underwriting in determining rates. For example, the Affordable Care Act of 2010, also known as Obamacare, limited the ability of insurance companies to set rates based on individual health history for Americans who purchased insurance through its exchanges.

Financial underwriting

The purpose of financial underwriting is to determine whether the amount of coverage applied for and already in force bears a reasonable relationship to the financial loss that would occur due to the untimely death of the individual. Basic financial underwriting is concerned with establishing a valid insurable interest, relating insurance to demonstrable needs, and ensuring a reasonable level of persistency.

In the case of alternative ownership arrangements, a financial insurable interest must exist. This includes situations such as business partners owning policies on each other as part of a buy-sell agreement, a corporation owning a policy on a key employee, or a trust owning a policy on the life of the trust owner for tax purposes.

Risk assessment

Types of Underwriting

The underwriting process consists of two main types:

• Financial Underwriting: This involves assessing the applicant's financial situation, including income levels, loans, investments and the number of dependents. The underwriter ensures that the coverage amount applied for aligns with the applicant's financial needs and circumstances.
• Medical Underwriting: Medical underwriting evaluates the applicant's overall health and wellness. Underwriters analyse factors such as age, pre-existing conditions, gender, lifestyle habits, and family medical history. This type of underwriting helps in determining the cost of the premium relative to the coverage applied for.

Factors Affecting Risk Assessment

Underwriters consider a wide range of factors when assessing an applicant's risk profile. These factors include:

• Age: Younger applicants generally pose a lower risk and are likely to have lower premiums.
• Health History: The applicant's overall health is a significant factor. Pre-existing conditions, high blood pressure, or other serious illnesses may lead to higher premiums.
• Height and Weight: Applicants with a healthy body mass index (BMI) are often offered lower premium quotes. A high BMI may trigger additional medical tests or higher premiums.
• Family Medical History: The insurance company also considers the applicant's family medical history, as certain conditions may be genetically linked.
• Occupation: Risky occupations, such as working in hazardous environments or construction sites, may result in higher premiums or be treated as high-risk applicants.
• Lifestyle Habits: Regular consumption of tobacco, alcohol, or other toxic substances can significantly impact the premium cost. Applicants may be charged higher premiums or have their applications rejected.
• Hobbies: Adventure-based hobbies, such as skydiving or car racing, are considered high-risk activities. Applicants engaging in these hobbies may be treated as high-risk and face higher premiums or application rejection.
• Driving Record: A history of traffic violations, accidents, or driving under the influence can increase premiums or lead to application rejection.
• Financial Stability: The underwriter assesses the applicant's financial stability, including income, assets, liabilities, and credit history. This information helps determine if the applicant can afford the premiums and if the coverage amount is justified.

The Underwriting Process

The life insurance underwriting process typically involves several steps:

• Application Quality Check: The underwriter reviews the application form to ensure it is complete and accurate.
• Medical Examination: This step involves a medical exam to assess the applicant's health, including basic measurements, blood tests, and drug tests.
• Information Analysis: The underwriter analyses various data points, including prescription history, medical records, motor vehicle records, credit history, and even a background check for any criminal record.
• Insurance Classification: Based on the gathered information, the underwriter assigns an insurance classification rating, indicating the applicant's insurability based on health and lifestyle factors.
• Final Assessment: At this stage, the underwriter may request additional documents and either offers the life insurance policy or rejects the proposal. A counteroffer with a higher premium may also be presented if the applicant is assessed as high-risk.

Impact of Risk Assessment on Coverage and Premiums

The outcome of the risk assessment has a direct impact on the life insurance coverage and premium quotes. If the underwriter determines that the risk is acceptable, the insurance company will grant coverage, typically at a rate corresponding to the level of risk. However, if the risk is deemed too high, the application may be denied. In some cases, the underwriter may provide coverage but with modifications to the policy, such as increased premiums, deductibles, or coverage limitations.

Premium calculation

The premium for a life insurance policy is the amount of money you pay for that coverage. The cost of a premium is calculated based on several factors, including:

• Age: Younger people are generally healthier and have a lower risk of dying, so their premiums tend to be cheaper.
• Health: The healthier you are, the lower your premium will be. Pre-existing conditions, such as diabetes, high blood pressure, and cholesterol, can increase your premium.
• Lifestyle: Risky behaviours, such as smoking, drinking alcohol, doing extreme sports, and having a poor driving record, can increase your premium.
• Gender: On average, women live longer than men, so they may pay lower premiums.
• Family medical history: If you have a family history of certain medical issues, such as diabetes or heart issues, your premium may be higher.
• Height and weight: Insurers often use Body Mass Index (BMI) to assess overall health in relation to weight and height. A high BMI may result in a higher premium.
• Occupation: If you have a dangerous job, such as working in a chemical factory, you may be considered a high-risk applicant and charged a higher premium.
• Type of coverage: The more comprehensive the coverage, the more expensive the premium will be. Term policies, which cover a certain period, are usually cheaper than permanent policies, which last a lifetime.
• Amount of coverage: The less coverage you have, the cheaper the premium will be.
• Personal information: Insurers may consider your claims history, driving record, credit history, marital status, hobbies, and where you live when calculating your premium.

Policy issuance

The policy issuance stage is when the insurance company decides whether to offer you a life insurance policy and, if so, what the terms of the policy will be, including the premium amount. This decision is based on the results of the underwriting process, which involves assessing your risk profile, including your health, lifestyle, and financial situation. Here's an overview of the policy issuance stage:

• Application review: The insurance company will carefully review your application form to ensure that all the information provided is complete and correct. This includes details about your medical condition, pre-existing illnesses, lifestyle habits, and personal information. In some cases, you may be required to attach supporting documents such as identification, driving license, passport, bank statements, and income tax documents.
• Underwriting stage: During this stage, the insurance company will assess your financial stability and medical history. They may request additional information, such as income tax returns, salary slips, bank statements, and existing insurance policies. The company will also evaluate your medical history, including your age, pre-existing illnesses, and lifestyle habits. They may ask you to provide past medical reports and undergo certain medical check-ups to get a comprehensive understanding of your health status.
• Final assessment: At this stage, the underwriter will carefully evaluate all the information gathered during the underwriting process, including your financial and medical reports and the results of any assessments. Based on this final assessment, the insurance company will decide whether to offer you a life insurance policy or reject your proposal. If you are assessed as a high-risk individual, the company may counteroffer with a higher premium for the same policy.
• Policy offer and acceptance: If the insurance company decides to offer you a policy, they will present you with the final terms, including the premium amount and coverage limits. It is important to carefully review the policy documents and understand the terms and conditions before accepting the offer. Once you accept the offer and sign the necessary paperwork, your life insurance policy will come into effect, providing financial protection for you and your loved ones.

The policy issuance stage is a crucial step in obtaining life insurance, as it determines your eligibility for coverage and the cost of the policy. The insurance company will use the information gathered during the underwriting process to assess your risk profile and set the terms of the policy. It is important to provide accurate and honest information throughout the process to ensure a smooth and favourable outcome during policy issuance.

Frequently asked questions