Demystifying Life Insurance Underwriting

Gretchen Dinucci

By Gretchen Dinucci | September 9, 2020

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 you meet with your financial professional. When you apply for life insurance, financial professionals run an illustration of the policy for you. This involves two assumptions: How much coverage you can get, and what the medical rating will be. The best financial professionals have a solid understanding of the underwriting process and can use your answers on the application to set realistic expectations.

Underwriting is not a black-and-white process. It’s always mostly grey, in my experience. Here is another area where the financial professional can help the process with a cover letter that explains anything about you or your 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 application.

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 policyholder.

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, prescription drug 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.

Your lifestyle is important, even if you have certain health issues. Our Lifestyle Credit Program rewards individuals who demonstrate a healthy lifestyle with regular check-ups and/or favorable lab reports, even with health issues such as heart disease, diabetes, obesity, and more.

In many cases, underwriting doesn’t take a lot of time. With our industry-leading Accelerated Client Experience (ACE) digital technology, the life insurance buying process is significantly reduced for many applicants, in some cases 24 hours or less. ACE is a seamless end-to-end digital process for clients, beginning with an online e-application, which your financial professional can guide you through. And, in today’s socially distant environment, it’s good to know that ACE can be contact-free. You can meet with your financial professional over the phone or via Zoom (or other video conferencing platforms). For individuals up to age 65 and cases up to $5 million, with a standard or better risk class, there is the potential for no medical exam or blood or urine samples, making the entire process truly contact-free. ACE has really streamlined the process for both the consumer and Financial Professional.

By working together with you and your financial professional to get a complete sense of you as a person, we underwriters are committed to providing you with the best and most cost-effective life insurance coverage.

This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.
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