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What is Underwriting?

Underwriting is the process insurance companies use to evaluate the risk of an insurance product for which an individual or business has applied. Insurers use underwriting to determine if they will issue a policy and, if so, how much the policy owner will need to pay for it.

Underwriting process guidelines

Underwriting starts with an application to a life insurance policy. After someone applies, the insurance company with which they’ve applied puts their underwriter to work.

Let’s say you’re applying for life insurance on yourself. The underwriter’s job is to evaluate you and your risk factors. When it comes to life insurance, this process essentially attempts to estimate how long you’ll live.

Life insurance companies care about your longevity because the longer you live, the longer you’ll be able to pay your premiums. And the more money they can recoup from you before you pass away, the less risk the insurer takes on in issuing you a policy.

To determine their risk in insuring you, a life insurance company’s underwriting process generally looks at:

  • Your age

  • Your gender (since women tend to live longer)

  • Your personal health history

  • Your family health history

  • Any medications you’re taking

  • Whether or not you smoke, drink alcohol, and use drugs

  • The risk factors of your occupation and preferred hobbies

  • Your financial stability

  • Criminal background

  • Insurance history

Additionally, insurers use underwriting to determine if the death benefit for which you’ve applied is reasonable. They’ll generally look at your salary and your assets (like your home) to decide if the face value you’ve requested makes sense with your current financial situation (since the goal of a life insurance payout isn’t to make someone rich).

Based on what the insurer turns up during underwriting, the underwriter determines:

  1. If they will approve or deny your application for coverage.

  2. If they plan to approve your application, how much they will charge you (i.e., your premium) for the policy.

Underwriting for a life insurance policy can take several weeks (unless you are using an online life insurance company such as Sproutt).

The evolving underwriting landscape

As more and more data about individuals becomes readily available, underwriting is becoming an increasingly complex process. Decades ago, life insurance companies underwrote policies based solely on the insured’s age and gender.

Today, that has changed. When you apply for life insurance, the underwriting process takes a lot into account, from the tapestry of your personal and family history to your lifestyle choices.

Types of life insurance underwriting processes

Once the life insurance company has all of the above information about the proposed insured, they must now review it and offer (or decline to offer) a policy to the applicant. Here is where in recent years technology has played a major role in speeding up the process.

It used to be that in order to qualify for just about any amount of life insurance, whether completely healthy or seriously ill, a blood test, urine sample, height & weight, blood pressure, and more were always required. This method still exists in what would be referred to as “full underwriting” and is used for older or more complicated cases.

However many people are now able to qualify for a policy without ever speaking to anyone or performing any labs or exams.

Accelerated Underwriting

Accelerated underwriting has no exam, and usually no need for medical records. Many companies now offer close to instant results for those clients who qualify. A word of caution: this is only an option for the healthiest of clients.

Accelerated underwriting is not guaranteed and when the insurance companies have any questions their first method of defense is to order a medical exam and check your medical records. After review, the policy may still be issued at the highest health rating.

This method does allow for the lowest possible rates, with the least pain, provided the qualifications are met.

Full Underwriting

This method is often referred to as traditional underwriting. Depending on the amount of insurance the exact requirements will vary. However, as previously mentioned, the most basic ones are blood, urine, height, weight, blood pressure, and a health questionnaire. This process may be referred to as a “paramed” exam.

Guaranteed Underwriting

Anyone who applied and is within the correct age limits will qualify, no questions asked. Unlike the other underwriting methods discussed in this article, the insurance company is not worried about the health, financials, risks, or insurance history of the individual applying for these policies. The only policies issued with this method are appropriately named “guaranteed whole life.”

Simplified Underwriting

This underwriting path is ideal for those individuals without a complicated medical record but who have high body mass index (BMI), credit, and other minor issues.

Similar to accelerated underwriting, there is no medical exam required. The exam is guaranteed to never be ordered. Rather, the life insurance companies will usually rely solely on a few reports such as the prescription and MIB report to issue these policies.

Understandably, the pricing is considerably higher than an accelerated or fully underwritten term policy. If the insured is willing to go through full underwriting and qualify for anything higher, this method is likely not in their best interest.

Streamlined underwriting with no-exam life insurance

The underwriting process we’ve outlined here applies to traditional life insurance policies, which generally require the insured to get a medical exam. But you can skip a large part of the process by applying for no-exam life insurance.

Simplified issue life insurance policies usually cost more and come with a smaller death benefit, but they can be a good option for individuals with serious health conditions that could raise red flags during the underwriting process.

Alternatively, you could choose accelerated underwriting life insurance, which skips the medical exam and streamlines the underwriting process, or guaranteed issue life insurance, which comes with no underwriting assuming you fit into the specified age bracket. Accelerated policies cost about the same amount as traditional life insurance but usually come with lower death benefits. Guaranteed life insurance comes with a waiting period (usually, two years) before the policy goes into effect.

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