Demystifying Life Insurance Underwriting

Gretchen Dinucci

By Gretchen Dinucci | June 16, 2015

Once you decide to buy life insurance, you will likely find your application being reviewed by “the underwriters.” This step is a complete mystery to many people, and some of the information required may be surprising. Why, for example, do underwriters need financial information? Why can’t insurance companies give a definitive, up-front cost for policy premiums when you apply? Why do you even have to “apply” for life insurance rather than just “buy” it?

I have to admit: If I wasn’t in the life insurance industry, I wouldn’t understand underwriting either, but there are really some very basic principles at work.

At the core of it, we underwriters are trying to determine factors that will impact your life expectancy, something that is an essential part of our pricing and evaluation process. If we can estimate how long you are expected to live, we can estimate what it might cost to insure you against sudden and unexpected death. We try to get as complete a picture as possible of the risk involved in insuring you, and that risk touches on many factors in your life.

Here are some tips and guidance that might make life insurance underwriting a little less mysterious:

The underwriting process starts when the client meets with their advisor. In applying for life insurance, advisors run an illustration of the policy for the client. This involves two assumptions: How much coverage the client can get, and what the medical rating will be. The best advisors have a solid understanding of the underwriting process and can use your answers on the application to set realistic expectations. It does no one any good to base an illustration on optimistic assumptions that won’t hold up during underwriting.

Underwriting is not a black-and-white process. It’s always mostly grey, in my experience. Here is another area where the advisor can help the process with a cover letter that explains anything about this person or situation that is at all unusual. We underwriters want to understand the whole person, and cover letters can be immensely helpful in providing the full story behind the answers we see on the forms.

It’s helpful to prepare for the medical exam. We want to have the best possible outcome for the proposed insured. There is nothing worse than when our lab tests require a person to fast overnight, but the applicant just ate breakfast. Penn Mutual offers our advisors an underwriting guide, and it includes a section called Preparing Your Client for an Exam:

  • Don’t do any strenuous exercise the day before.
  • Watch your caffeine intake.
  • No alcoholic beverages at least eight hours before the exam.
  • Get a good night’s sleep before the exam.
  • Drink a glass of water an hour beforehand.
  • Have your photo ID available.

These are all simple things, but they can make a big difference in the success of the medical exam.

Your driving history is important, as is your medical history. Underwriting is meant to get a complete picture of your risk. One of the riskiest things we do in our lives is to drive a car, so we may ask for authorization to review your driving history for motor vehicle violations or accidents. Likewise, we may ask your permission to get your medical history from your doctors so we can understand any potential health risks.

Underwriting may look at your finances. For larger policies, we may need to ask for tax returns, an estate analysis or other financial information. Part of the underwriting process is justifying the “face amount” of the policy — the death benefit that we’re going to pay out. We ask for financial information to determine the potential economic loss of an unexpected death and what the level of insurable interest is for the policy owner.

Affordability is an important factor. We also want to make sure you can afford the premium. If a client ends up only being able to afford a policy for two or three years, that’s not a favorable outcome for either the client or the insurance company.

The rating class determines the cost of your policy. Your underwriting class is based on your current health, medical history, and things such as the use of nicotine or hazardous activities. If you are in excellent health, your premiums may be lower than the standard rate. Alternatively, depending on the nature, severity, and treatment of any impairment, your insurance premiums may be higher.

Underwriting takes time. The medical exam may take only 30 minutes, but that’s only one small part of the underwriting process. While we try to make a determination as quickly as possible, if we need to get medical records or financial information, it could take up to six weeks. Our goal is to do the best we can in making a quality risk assessment, but we also want to do it in a timely manner.

You can take out temporary life insurance while waiting for the underwriting process. This temporary insurance is part of the application process, and you can choose to buy it at the time of the application. There are a few simple questions that determine whether you are eligible, and you would then have limited coverage for the face amount of the insurance you applied for, up to $1 million. Not everyone takes advantage of this, but it is always an option.

I hope this has helped you get a better understanding of life insurance underwriting. We underwriters are simply trying to get a more complete sense of you, as a person, so that we can provide you with the best and most cost-effective life insurance coverage.

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