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Life Insurance 101: What is underwriting?


Understanding what it means can help you find the right kind of life insurance for you and your family.


What is underwriting, anyway? And how does it affect you?


Underwriting is evaluation of risk. Essentially, an insurance underwriter assesses the riskiness of an applicant, determines whether their company should insure that person, at what price, and for what amount of coverage. This is true for all kinds of insurance, including home, where the “risk” would be damage to a property; auto (damage to a vehicle); and, of course, life insurance, where the thing underwriters call “risk” is usually referred to as “death” by the rest of us.


While the idea is simple (evaluate risk, attach a price to it), the risk assessment and underwriting process has become especially complex in recent decades. The modern life insurance policy began with the industrial revolution in the 1800s, but the underwriting process was fairly basic until the 1940s. Until then, insurance premiums were based entirely on age. After that, insurers started considering gender, too (male mortality rates are generally higher than female rates). With the advent of more technology and more data from the second half of the 20th century onwards, however, the range of factors which insurers consider has expanded, as has their ability to consider them in detail.

Rate classes

Underwriting, and insurance in general, is based on “the law of big numbers". We can’t know an individual’s level of risk precisely, but we can get a good level of precision for a group of people if the group is large enough. Therefore, insurers look at an individual in terms of age, health, behavior and other factors, then assign that person to a particular “risk bucket.” These are called “rate classes” in the insurance world. While you are offered an insurance policy tailored to you, it’s actually based on the rate class that you’ve been assigned to, based on your individual data.


So what do insurers assess in order to put people into rate classes, and therefore determine the policy you’ll be offered?

Your physical health

Physical health is also another factor that is considered in underwriting guidelines. For life insurance underwriting we’re looking at a number of dimensions, one of which is medical. We take self-reported medical histories, data such as prescription history, family history, tobacco use, and evaluate it all to get a deeper understanding of applicant health. Sometimes a medical exam will form part of that data. Just because you might need to do a medical exam, it doesn’t necessarily mean your premium will be higher — it just means the company doesn’t have enough specific information to be confident in its decision without fluids.

Your financial health

There’s also a financial element to your risk assessment: making sure an insurance policy is appropriate for an individual’s financial situation. Obviously, an insurance company wants to know an individual has the income to afford their premium, but beyond that, can a person be over-insured? We want to make sure the death benefit is appropriate, just to make sure all the incentives are aligned appropriately.

Behavior

Another factor considered by underwriters is behavior, which includes driving history, occupational history and hobbies. Unsurprisingly, a firefighter who races motorcycles in his spare time will usually pay more for life insurance coverage than someone who works in an office and spends weekends in their garden. But for less extreme examples, isn’t the idea of dangerousness subjective? How do insurance companies define “risky”?


It’s a combination of different data from different industries and different levels of expertise. Each individual situation is different. That can be as nuanced as, for a certain type of cancer, looking at the size and grading of a tumor and the probable progression of that disease. When it comes to behavioral risk — factors like driving history and hobbies — there is also data that correlates those types of things with mortality. The life insurance industry as a whole has a tremendous amount of data correlating those inputs to mortality outcomes going back decades.


However, while on the majority of things there’s pretty clear consensus on what’s risky and what’s not, insurers take slightly different perspectives at the margins. Some carriers are very risk averse for certain hobbies. It might have just been one claim they saw [which made them that way]. By the same token, some carriers feel they have the data to support a looser stance on a specific risk. Sometimes it might come down to having a specific insurance underwriter or physician at your company that really has the expertise you need to evaluate a specific risk. There are also just different philosophies at different companies. Marijuana use is an example where, over time, different companies have moved at different speeds. Some carriers take a conservative approach and others have loosened up as it becomes legal in more states.

Outliers

These “different perspectives at the margins” mean that if you’re a life insurance outlier — risky behavior or job; difficult medical situation — it’s best to shop around. For people that have serious medical conditions there are specific insurance brokers that make their living by knowing the differences between different carriers and helping high risk applicants find the carrier that will view them most favorably.


Even if you’re not a high-risk applicant, we would always suggest you shop around for the best price and service before choosing your life insurance policy. A little extra time up front can pay off considerably when it’s time to select your coverage.


It’s important to be honest in the application process. The issuance of the policy or payment of benefits may depend upon the truthfulness of answers you give in the application.


For more information about Life Insurance call JCT Insurance Agency at (626)354-2000 or email jctfinancialsvc@gmail.com

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