Critical illness insurance underwriting

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Critical Illness Insurance Underwriting

Underwriting is the process that insurance companies use to evaluate the risk of an individual applying for insurance coverage. Underwriters look at factors that are relevant to the likelihood of the payout of a claim, such as smoking status, physical build and medical history. With the information, they can determine whether or not to approve an application and the premium to charge that reflects the applicant’s risk. Although underwriting for critical illness is similar to underwriting for life insurance, some differences are apparent enough that they merit attention.

Underwriting for critical illness insurance

The underwriting requirements for critical illness insurance is similar to life insurance. Depending on the amount of coverage and your age, you may be required to provide a blood and urine sample, undergo an ECG test and more. Personal information such as your history of illness and smoking status will also help the underwriter assess your risk, as is the case with life insurance. Smokers will be given smoking rates and non-smokers will benefit from lower non-smoking rates.

Because payout of a benefit for critical illness insurance happens at the diagnosis of disease, it has a much higher incidence rate than payout for life insurance, which only takes place at death. Therefore, the level of risk is higher and underwriting is more stringent, making it harder to qualify for critical illness insurance than life insurance.

Medical history of your family

It should come as no surprise that the medical history of your natural parents and siblings is extremely important. A strong positive family history for hereditary diseases such as cancer and diabetes may significantly increase the likelihood of such disease manifesting themselves in immediate family members. The underwriter takes into account the nature of the condition involved and incidence rates among parents and siblings. The age at diagnosis of a disease for a family member is important as the younger one is when diagnosed, the more likely a family member will also develop the illness.

Take the example of a 33 year old non-smoking male in good health. His father developed colon cancer at age 53. This fact alone would not make a difference in his ability to qualify for life insurance at a standard rating. But for critical illness insurance, he may have to pay a 50% higher premium because he presents a higher risk for cancer.

Major illnesses to be aware of include: cancer, diabetes, heart disease, stroke, high blood pressure, multiple sclerosis, Huntington’s Chorea, Alzheimer’s disease, kidney disease, mental illness, and any other hereditary disease.

Your personal medical history

Your own medical history is also taken into consideration in assessing the overall risk for critical illness insurance. For example, consider a 43 year old non-smoking male in good health. He is 5’10” and 240 pounds. For life insurance, his build would not be an issue and he would be given a policy with a standard rating. But with critical illness insurance, he is likely to be rated 125% (25% higher premium) since he is at higher risk for heart disease, stroke or cancer because he is overweight. Any condition that increases the risk for developing a major illness will be met with a rated or declined underwriting decision.

If you had cancer before, you will likely be declined for critical illness insurance even long after successful treatment, as the risk of recurrence remains unacceptably high from the insurance company’s perspective. Some exceptions apply, such as non-melanoma skin cancer that has not metastasized.

Your occupation and lifestyle

Lifestyle choices are also important in determining your eligibility for critical illness insurance. Leading a riskier life more prone to suffering a major illness means facing a possible rating or decline. Alcohol and drug abuse can result in damage to the heart, lungs, kidneys, brain and liver with serious consequences for a major illness risk.

Excessive drinking and a poor driving record are also connected with accidents leading to an increased risk for covered conditions such as loss of limbs, coma, paralysis, blindness and burns. Additional information such as a motor vehicle report may be requested by the underwriter to further assess your risk.

Hazardous sports such as hang gliding and motorcycle racing presents an increased risk of incurring a claim. This may be handled with a rating or exclusion for the activity.

Most occupations will be accepted at standard risk, but individuals with higher risk occupations, such as those that expose them to carcinogens, working at heights or underground or working with explosives will require careful consideration.

An inspection report may be necessary for coverage over $1,000,000. The inspector asks questions regarding occupation, finances, alcohol/drug consumption, driving record, smoking, medical history, and overall lifestyle to gather more information for the underwriter.

Typically, your amount of coverage will be limited to a multiple of your income plus your mortgage balance. For example, up to age 50, RBC Insurance will allow up to 9 times of your net income plus the remaining balance on your home. At older ages, the multiple will decrease, resulting in a lower maximum coverage.

Things to do before you apply for critical illness insurance

If you’re interested in purchasing critical illness insurance and were wondering if you would qualify, complete the pre-underwriting checklist with your broker. If you have ever been diagnosed with any of the listed illnesses, you are not eligible for critical illness insurance. The list varies by insurance company but usually includes but is not limited to cancer, heart disease, kidney disease and insulin-dependent diabetes.

Existing medical conditions should be explained in detail. Thorough and complete applications are underwritten more quickly and fairly, as they help the underwriter get to know you well enough to evaluate you as an insurance risk. With a better idea of who you are, the underwriter is able to complete the evaluation sooner and with less additional evidence.

If you have any inquiries regarding a particular situation, ask your broker to submit a preliminary underwriting assessment. It will let you know the likely underwriting decision and can save time from having to submit an application that you know will be rejected. Also, if submitting an application that requires additional information to evaluate your risk, ask your broker to write a cover letter explaining your condition in full detail.

Underwriting is a mandatory and sometimes troublesome part of an insurance application. Try to prepare for it by knowing the type of information required and managing your expectations.

Image courtesy of  Jeroen van Oostrom /