When you submit an application for term
insurance to an insurance company, the company underwrites
your application. This means that it will look at the
information provided by you (and obtain information from
other sources, if necessary) in order to assess the risks
associated with you as an individual. Based on the results
of underwriting, the insurer will decide whether or not to
sell you a term insurance policy.
It's not simply a matter of accepting or
rejecting your application, though. Assuming the company
deems you insurable, it will place you in a pool with other
applicants who share similar characteristics and pose a
similar degree of risk. This risk classification determines
the premium you will pay for term coverage.
How do insurance companies classify
term insurance applicants?
When you apply for term insurance, you will be classified
into one of the following four general risk groups:
standard, preferred, substandard, or uninsurable.
Standard risks:
These are individuals who, according to the insurance
company's underwriting standards, are entitled to term
insurance without having to pay a rating surcharge or be
subjected to policy restrictions.
Preferred risks:
This group includes individuals whose mortality experience
(i.e., life expectancy) as a group is expected to be above
average and to whom the company offers a lower than standard
rate. The most common preferred class today is nonsmokers,
for whom many insurers now offer a favorable rate.
Substandard risks:
These are individuals who, because of their health and/or
other factors, cannot be expected (on average) to live as
long as people who are not subject to these risk factors.
Substandard applicants are insurable, but only at higher
than standard rates that reflect the added risk. Policies
issued to substandard applicants are referred to as rated or
extra risk policies.
Uninsurable:
These are applicants to whom the company refuses to sell
term insurance because they're unwilling to shoulder the
risks. They've decided that the risk factors associated with
the applicant are too great or too numerous. In other cases,
the applicant's circumstances may be so rare or unique that
the company has no basis to arrive at a suitable premium.
What factors go into the underwriting
process?
An insurance company typically looks at a number of factors
during the underwriting process in order to evaluate you in
terms of risk. These factors enable the insurer to decide
whether or not you are insurable and, if you are, to place
you into the appropriate risk group. Some of the things
considered are the potential insured's:
- Age
- Sex
- Current health/physical condition
- Personal health history
- Family health history
- Financial condition
- Personal habits/character
- Occupation
- Hobbies
Where does the insurance company get
its information?
An insurance company will gather information about you from
several sources:
Your application:
The basic source of underwriting information is your
completed application for term insurance. The questions on
the application are designed to give the insurer much of the
information needed to make a decision. The company will then
either reject your application, accept it and offer you
insurance at a certain rate, or seek additional information.
Information from your agent:
In many cases, the company places great weight on the
recommendations of the insurance agent, particularly when
the agent has a good track record with the company.
Information bureaus:
The insurer may seek information on you from one of the
cooperative information bureaus the insurance industry
supports. The best known example is the Medical Information
Bureau (MIB), which maintains centralized files on the
physical condition of individuals who have applied for life
insurance with member companies.
Physical examinations:
In life insurance, one of the primary factors in assessing
risk is your health. So it's no surprise that one of the
most important sources of underwriting information is a
physical exam. After examining you, a physician selected by
the insurance company supplies the company with a detailed
medical report. This report generally tells the company all
they need to know about your present health.
What is the purpose of the underwriting
process?
In a nutshell, the purpose of term insurance underwriting is
to spread risk among a pool of insureds in a manner that is
both fair to you and the insurer. Like all other businesses,
insurance companies need to make a profit. Therefore, it
doesn't make sense for them to sell term insurance to
everyone who applies for it. Although they don't want to
make you pay an excessively high rate, it's not wise for
them to charge all their policyholders the same premium.
Underwriting enables the company to charge applicants
premiums that are commensurate with their level of risk.
When my term policy expires, will I
have to go through the underwriting process again?
It depends. Some term policies have a clause that allows you
to automatically renew the policy when it expires without
having to resubmit to the underwriting process. This means
that the company has to renew the policy at the same premium
rate, even if your risk factors have changed (e.g., your
health has declined) since the company sold you the original
policy.
If your policy doesn't contain this
provision, you will have to reapply for term insurance when
your policy runs out and undergo what is known as
postselection underwriting. At this time, the company has
the right to deny continued coverage. Even if they don't
deny you insurance, it's likely they will at least put you
in a higher risk group and raise your premium based on your
increased age.
Learn More...
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Insurance Overview | Understanding
The Basics | Term
& Cash Value
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| Reading Policies | Planning
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Calculator | Life Glossary
Please Note: The
information contained in this Web site is provided solely as a source of
general information and resource. It is a not a statement of
contract and coverage may not apply in all areas or circumstances. For a complete
description of coverages, always read the insurance policy, including
all endorsements.
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