What is life insurance underwriting and how is it done? Here’s what buyers need to know

Life Insurance Underwriting is the process by which life insurance companies determine a customer’s eligibility for a particular policy.

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By Anup Seth

The business of life insurance is one of protection against risk. When you buy a life insurance policy, you are buying one with the idea that if an incident results in your unfortunate demise, your family is taken care of financially. In other words, you purchase a policy because, to your mind, the risk of your family being left without a financial support system after your death outweighs the cost of paying a premium.

Similarly, an insurance company also protects itself against risks arising out of carrying out its day-to-day operations of issuing policies to its customers. The way a life insurer fulfils the role of financial risk managers for you, reinsurers protect the financial risks of insurance companies. These reinsurers lay out guidelines for life insurers to follow before issuing a policy to the customer. Essentially, the life insurer assesses risk associated with every individual looking to buy a policy and determine a fair premium rate to match that risk.

To summarize, underwriting is the process by which life insurance companies determine a customer’s eligibility for a particular policy. It is one of the most crucial aspects of issuing a life insurance policy as a careful and accurate risk assessment allows life insurance companies to offer the best in class service to its customers, innovate newer solutions, issue policies to as many people as possible, and settle claims effectively.

Types of underwriting

A life insurer assesses your policy eligibility by accounting for various factors like age, income, occupation, lifestyle, underlying medical conditions, weight, body mass index, etc. Based on these parameters, companies typically classify underwriting into two broad categories – 

  • Financial underwriting

The company considers your income, job, life stage and your ability to pay the premium for the tenure of the policy to determine whether the amount of life cover you are wanting to purchase is according to the needs of you and your dependents.

  • Medical underwriting

Commonly referred to as mortality assessment within the industry, this aspect of underwriting accounts for your age, lifestyle, habits like smoking, drinking and your propensity for underlying diseases based on your family history.

Financial underwriting

Financial underwriting is a process which insurers use to calculate the amount of life cover which is appropriate for your situation. After you express interest in purchasing a certain amount of life cover, the insurance company will conduct a thorough analysis of your financial situation. At this stage you will have to provide various documents such as salary slips, bank statements, telephone bill, electricity bill, passport, aadhar card, income tax returns etc.

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If you have ongoing, previously purchased insurance policies under your name, you may need to provide details about those as well. While some customers might find this process intrusive, it allows the insurer to determine your exact risk appetite. You may have inadvertently overestimated your life insurance needs which would lead you to paying an unnecessarily high premium. On the contrary, if you have been overly conservative in estimating your life insurance needs, the company can offer you a policy with even better value. Financial underwriting will let the insurer help you avoid either of these pitfalls and serve you better.

Medical underwriting: Never hide anything from your doctor….and your life insurance provider

The importance of disclosing your medical history while buying a policy cannot be understated. This includes the medicines you take on a regular basis, any hospitalisations you may have undergone in the past, upcoming minor or major surgeries and pre-existing conditions.

When you apply for a life insurance policy, a representative of the company will call upon you for conducting medical tests and/or collecting samples. These tests are very important as they serve as a snapshot of your health at that moment in time. The results of the tests form the basis of all your dealings with the company from premium pricing to claim settlement.

All of the above factors are taken into account while issuing the policy. If your medical tests reveal any discrepancy between your results and the information you disclosed while applying for the policy, it could create unnecessary delays in issuance and might also lead to your policy application being rejected. Moreover, when you agree to the terms and conditions of a policy it is assumed that you have been transparent about your medical history. This is termed as the principle of ‘utmost good faith.’ Wilful nondisclosure of critical health information while buying can affect claim settlement process. 

Some buyers think that revealing pre-existing conditions will lead to them not being covered or a rise in premium payable. However, most insurance providers cover such ailments after a small waiting period. Hence, even though keeping things from your insurance provider might give you a sense of comfort for having avoided a slight increase in premium, it may prove much costlier if such nondisclosures are discovered at a later stage. Consequently, you will end up being exposed to the financial risk you had set out to cover for your loved ones. 

It is advisable to be as comprehensive as possible while declaring your health status to your insurance provider. This will help the underwriting system to work in your favour by determining the fairest premium price, faster policy issuance, minimizing the risk of policy and/or claim rejection and maximizing your policy’s long term value proposition.

(The author is Chief Distribution Officer, Edelweiss Tokio Life Insurance. Views expressed above are those of the author and not necessarily of financialexpress.com)

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