Life insurance is an important investment to safeguard your loved one’s future. But have you ever wondered how a life insurance provider determines your policy? We’re here to demystify the process!
In determining your policy, the life insurance provider completes a process called underwriting. The purpose of underwriting is to analyze the level of risk to the life insured in order to determine:
- Length of coverage
Once you apply for life insurance, the application is sent to an underwriter. An underwriter is a person who uses various tools and reviews several factors to assess your level of risk, give you a rating, decide if your application should be accepted, and determine the specificities of your life insurance policy.
Every life insurance provider has their own guidelines for how they underwrite a life insurance product and/or plan. This means their underwriting process and the factors they base your policy on may vary.
As part of their underwriting guidelines, the underwriter may also assign you a rating or classification in order to place you in a certain risk group. Common risk groups include preferred or standard. However, different life insurance providers may have other rating classes. These labels are used to show how much risk they’ve assigned you. Here are a few examples of life insurance classification groups:
- Preferred – the life insurance provider views you as low risk and this may lower your premiums.
- Standard – the life insurance provider may consider you average risk and therefore your premiums will be higher than if you were labelled “preferred.”
- Other classification groups which are considered very high-risk may cause your premiums to increase significantly or cause the life insurance provider to deny your application altogether.
Underwriting Application Process
No medical life insurance
No medical life insurance involves a simplified underwriting process. Depending on the life insurance provider, the application may have some health-related questions but does not require you to complete a medical exam or medical tests.
Since the simplified underwriting process doesn’t require as much medical information, this results in a quick application process, and the policy may be issued to the customer in just a few days.
Traditional life insurance
Traditional life insurance policies are fully underwritten. This process involves underwriters using mortality tables and other tools to determine your level of risk.
This can be a longer process than the no medical life insurance application process since they need to collect a variety of information and you may need to complete a full medical exam including:
- Paramedical exam – a third-party medical examiner checks your height, weight, blood pressure, and vitals. The exam may also include a personal interview to collect information about your medical history.
- Attending physician statement – a report your doctor provides to the insurance provider summarizing your medical history.
- Telephone interview – an interview over the phone with the insurance provider where they will ask health and lifestyle related questions.
Factors That May Be Considered When Underwriting a Life Insurance Policy
The factors that insurers consider when underwriting your life insurance policy will depend on the life insurance provider. Here are some factors that may be considered:
Age nearest – which is your age on the birthday you are closest to
Age last – also known as Actual age – is your current age at time of application
Age plays an important part in the underwriting process. As you age, the greater your likelihood of being diagnosed with a disease and/or illness, increasing the level of risk on behalf of the life insurance provider. The difference between age nearest and actual age may seem small (a few months). Yet, life insurance providers often have their plans priced in specific age bands or ranges.
An underwriter will look at your health status at the time of the application. You will be required to disclose if you have an illness or disease, or perhaps a condition is discovered if you were required to complete a medical exam. They will also look at your personal health history to see if you have been diagnosed with diseases, illness or have been treated for any medical issues.
An underwriter will review the health history of your immediate family such as your parents and siblings. Family health can be an indicator of your own health throughout your lifetime. For instance, if your mother is a breast cancer survivor, it could mean that you have a predisposition for being diagnosed with the disease as well. As your family members age, they may experience more health issues.
Smoking is linked to several health issues and increases the chance of mortality. Life insurance providers may consider smokers differently, depending on their own factors. It’s important for customers to do their research to understand how each life insurance provider factors smoking into their underwriting process and what they constitute as a smoker.
For some life insurance providers, discovering that you were previously declined life insurance coverage from another provider may raise red flags that you are higher risk.
Underwriters may consider if you engage in extreme sports or other risky hobbies when underwriting your plan since these hobbies may increase your risk of early mortality. Activities may include rock climbing, skydiving, amateur car racing, and more.
Some underwriters will require a financial inspection report. The types of financial information you will need to provide will vary by life insurance provider. Although, these details may include earned income, net worth, debts, and more.
Underwriters may look at your travel history and may note if you have extended travel plans in the near future. This could increase your risk if travel plans include war-torn countries or regions with a higher chance of contracting a disease or illness.
Some occupations require you to put your life at risk. An underwriter will consider the job you work at on a day-to-day basis and how that may increase your risk. For instance, high-risk professions may include police officers, construction workers, firefighters and others.
The life insurance provider may ask for a motor vehicle report to review your driving history and level of risk when it comes to your driving habits.
Canada Protection Plan offers No Medical and Simplified Issue Life Insurance, a life insurance option with a straightforward application process which allows you to get your policy issued fast!