Underwriting: How Insurance Companies Evaluate Your Application

Published In Insurance

March 31st, 2016

Life insurance is complex, and the purpose of this and the other life insurance articles on Senior Care Advice is to simplify it. Specifically, we want to give you the knowledge by which to make smart decisions about obtaining life insurance, keeping what you have, buying more, or letting it go. There is no “one-size-fits-all” answer.

One of the big mysteries for seniors, especially those who are no longer covered by group life insurance policies at work, is figuring out whether they can qualify for individual life insurance (or for more if they already have some). That is, how is their application judged? That triggers the whole concept of underwriting, which is the subject of this article.

What is “Underwriting”?

“Underwriting” is not specific to insurance. It occurs in all types of financial transactions, such as loan applications. For example, most all of us have borrowed money or applied for a credit card. There, underwriting involves the assessment of an applicant’s credit worthiness. A prospective lender examines an applicant’s credit history, employment, earnings, and other factors to determine the likelihood that he or she will repay the loan or the charges on a credit card. The lender will have established guidelines to determine which applicants are granted or denied credit, and on what terms (such as the different interest rates).

What the lender is doing is assessing the risk that the loan will not be repaid. If the risk of non-payment is too great, such that factors personal to the applicant do not fit within the loan underwriting guidelines, it will deny the application. But if the risk is marginal, the lender may decide to take a chance and extend the loan, compensating for the increased risk by a higher interest rate or in other ways. Different lenders have different guidelines, so an applicant unacceptable by one lender may be acceptable to another.

What is Insurance Underwriting?

In the context of insurance, including life insurance for seniors, underwriting is also about risk. Specifically, underwriting is a term used by life insurers to describe the process used to evaluate risk. The main goal of underwriting life insurance policies is to ensure that enough money is collected as a premium to compensate the insurer for taking on the risk of insuring an individual with stated characteristics. The risk that the insurer assumes on a life insurance policy is paying the face amount of it when the insured dies.

Like lenders of money, insurance companies utilize underwriting guidelines. However, because the issuance of, for example, a life insurance policy is very different from the grant of a loan of money or issuance of a credit card, the underwriting guidelines are different. Whereas a bank is concerned with the way that credit was handled in the past and with the applicant’s income and other financial obligations that bear upon the lender’s risk. a life insurance company will be concerned with risk factors such as:

  • Gender
  • Age
  • Health history of the applicant
  • Heath history of the applicant’s biological family

Why? Because those are some of the risk factors that, as a whole, help a life insurance company estimate the expected remaining lifespan of an individual to whom it issues a life insurance policy. The estimation and resulting calculation of how much to charge as the premium is done by highly skilled mathematicians called actuaries.

Based upon the underwriting guidelines that the insurer uses, the outcome of an application may be one of the following:

  • A life insurance policy is issued in the amount requested at a “standard ” (meaning that there is no surcharge to the premium to reflect an additional risk factor).
  • A life insurance policy is offered in an amount less than requested at “standard rate” (as a means of reducing the insurer’s risk exposure).
  • A life insurance policy is offered in the amount requested at a “non-standard” rate (meaning that risk factors exist that require the insurance company to charge a greater premium to offset the risk).
  • A life insurance policy is offered in an amount less than requested at a “non-standard” rate (as a means of even further reducing the insurer’s risk exposure).
  • Rejection of the insurance application because the applicant does not fit into any of the established risk classifications of the insurer.

Life Insurance Underwriting for Seniors

Lest you be discouraged, all is not lost. There are life insurance companies that have designed policies for older adults and underwrite them in ways that take age into account. However, in addition to the usual medical questions and paramedical examinations, the underwriting process for life insurance for seniors sometimes includes cognitive tests such as:

  • Landmark Drawing Copy Test–Trail Marking Test– The applicant will be given a paper with many circles on it with letters or numbers in the circles. He or she will be asked to draw a continuous line without lifting his or her pen or pencil to connect the symbols (numbers or letters) in order.
  • Delayed Word Recall Test–The applicant will be shown 10 words and asked to use each in a sentence. Later in the testing, he or she will be asked to recall as many of the words as possible.

There are also other options offered by some life insurance companies, including:

  • Simplified issue policies. Applications for these usually ask 4 questions, require no physical exam, and are underwritten based on the answers to the questions:
  1. Do you smoke?
  2. Do you now live in a hospital or long-term care facility?
  3. Have you been declared terminally ill?
  4. Do you have AIDS or HIV?

The premiums for these policies are usually very high compared to underwritten policies.

  • Guaranteed Issue Policies. These have no health questions to answer nor is there a requirement of a medical exam. The big drawback to these is that the full amount of the policy is usually not payable until it has been in force for a stated period of time. If the insured dies before then, the insurance company only returns the amount of premium paid.

For more information about Life Insurance, including whether or not older adults should buy it, see What is Life Insurance and Should Older Adults But It?

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