If you’ve decided to purchase life insurance, you should be aware of an important person standing in the way between you and your policy. Known as the life insurance underwriter, he is an employee of the insurance company who assesses your risk. He draws from medical and personal information provided by you on the policy to come up with the underwriting decision. The underwriter can also consult with his team of accountants, medical doctors and actuaries. If age and coverage amount necessitates it, he will even look at your blood profile, request a statement from your attending physician, X-rays and an electrocardiogram. For the average applicant, a blood test and measurement of your vital signs are sufficient to produce an underwriting decision.
After gathering all the information necessary, he will compare it with mortality tables and mathematical models to classify your risk. These models predict your life expectancy based on past incidence of mortality for your specific risk. Through this process, the underwriter can determine your insurability and come up with an underwriting decision. Here are 5 life insurance underwriting decisions that you should be aware of.
The most common underwriting decision is the approval of the application at standard rates. It’s important to note that life insurance premiums are guaranteed, so that if you become a higher risk later in life due to health or lifestyle choices, the insurance company has no recourse to demand a higher premium. This is the main idea behind locking in your insurability, in which you apply for life insurance while you’re young and healthy.
Approved with preferred rates
Some insurance companies reward individuals who live healthier or less risky lives by offering a lower premium. The discount on the premiums can be up to 30%, which could equal savings of thousands of dollars over the term of the policy. This is the best underwriting decision for you because of the cost savings. Factors that are considered include fitness, smoking status and weight control.
Typically, the insurance company will allow you to choose whether to keep the same premium and get a greater amount of coverage, or keep the same coverage and lowering the premium. The choice is yours to make on the application. If you did your due diligence and determined how much coverage you need, then you should keep the same coverage and take the lower premium.
An underwriting decision that is disappointing to see is a substandard approval, or rated. Due to less than ideal health or lifestyle choices, premiums may be from 125%-500% of the standard rate, depending on the severity of your condition. An alternative to a rated premium is an exclusion for a hazardous avocation (risky hobbies) by the insurance company. If you die from an accident while performing the excluded hazardous avocation, the exclusion will preclude the insurance company from paying a claim.
Unlike a policy that was approved standard where premiums can no longer be increased by the insurance company, the opposite is not true. If your policy was approved substandard, you can show evidence of your improved health at a later date to have the premiums lowered. This generally involves similar underwriting requirements that you took when you first obtained the policy. If the insurance company no longer considers you high risk, then from that moment on you can benefit from lower premiums.
You have two options if you become rated: take the policy or apply to another company. Although it’s unlikely another insurance company would approve you at standard rates, an inquiry could be made to confirm this. In the meantime, you should take the policy and accept the underwriting decision as a warning sign that you’re not as healthy as you thought. Hopefully you change your lifestyle so that you can apply to have your health reassessed for a more favourable premium.
Only about 4% of all applicants receive the bad news that their application has been declined. Don’t get your hopes too down because you do have other options available. First of all, you should find out the reason you were declined from the insurance company. They can only reveal this information to you only, and not your broker.
You can appeal the decision by providing more information to support your case. The underwriter may consult other members of his team to come to a consensus. It’s rare but you may have the underwriting decision overturned this way.
You can also apply again after you change your lifestyle and improve your health. If you’re unwilling or unable to do that, you can apply for simplified or guaranteed issue life insurance. These applications have a few medical questions (or none, in the case of guaranteed issue) and requires no medical tests. Keep in mind that because the insurance company is assuming most if not all of the risk, the premiums will be much higher than a medically underwritten policy.
Even though these may not be the best of options, the point remains that you should not give up your quest for coverage. Because of the implications of a declined application, it’s more imperative than ever to get the proper coverage.
Finally, your application for life insurance may be postponed. It means that the insurance company is not ready to offer you life insurance because of a condition that may reveal more information at a later date. Instead of waiting around without coverage, you could apply for simplified issue life insurance so you have coverage in the meantime. Your premiums will be temporarily higher until the original insurance company is ready to look at your case again.
Now that you know about all the underwriting decisions, hopefully you are better prepared to deal with the outcome.