You Don’t Have to Be Afraid of Underwriting

Underwriting — the process by which the insurance company determines whether or not it will insure you — is the very heart of insurance. And if you’re deemed insurable, underwriting is the process by which they determine how much to charge you for the protection.

When determining whether or not you’re insurable and what your premium will be, the insurance company places you into one of three categories of risk, although you do have some flexibility to negotiate a better placement. The three levels are:
– Preferred risk
– Standard risk
– Substandard risk

Ideally, you want to fall into the top category. The insurance company looks at four things to determine your category of risk:
1. Your current health status: Through a medical history and the required medical exam, the insurance company places you into one of the categories. A personal history of illness puts you into a high-risk category. If your health has been good, you qualify at a higher level, which translates into lower premiums.

The insurance company also asks about your family’s medical history, including the ages at which your parents, grandparents, and/or siblings died. If your parents died at relatively young ages or if one or both of them had serious diseases such as cancer, heart disease, or diabetes, you may fall into a higher risk category.

2. Your projected health status: Your current health status, your personal medical history, and your family’s
medical history (see the preceding bullet) all indicate how much risk you have of dying earlier than the statistics project based on your current age. Because the insurance company is betting that you’ll live longer than expected, a good projection means that you’ll either pay your premiums for a longer period or you’ll cancel your insurance at some point. Either way, the company has use of that money and never has to pay off.

3. Your job: Some jobs are simply riskier than others. The degree to which your occupation places you into a high risk category (not too many do, by the way), translates into the amount of your premium. Changing jobs or careers isn’t an option for most people, and doing so just to save money on a life insurance premium is absurd. Nevertheless, you should know that your job does have
an effect.

4. Special circumstances: If the insurance company identifies any unusual or special circumstances, it will investigate. If, for example, you suddenly — with no apparent reason — buy a $5 million policy when you’re in your 20s, the insurance company may ask a few more questions than usual.

Likewise, if you make a statement in your application that conflicts with other statements. If the company isn’t satisfied with your answers, the underwriter will ask you to elaborate.  The degree to which you can resolve any unusual circumstances without having to force an investigation makes you more insurable at a lower premium rate.

Taking the medical exam

Medical exams for underwriting life insurance can involve anything from a quick review of your medical history, your family’s medical history, noting your height and weight, and taking basic vital signs (blood pressure and pulse) and a swab of cells from the inside of your cheek, or it can be a more extensive exam requiring an EKG (electrocardiogram), blood tests, X-rays, and urinalysis. In addition, on your insurance application, you give the insurance company permission to check with your doctor to follow up on any findings or questionable items on the application.

The extent of your physical exam is based on the following:

• Your age
• Your medical history
• Your family’s medical history
• Whether you smoke
• The amount of insurance you’re seeking to buy

For the quick review, usually a health professional comes to your home or office. If you need to undergo more testing, the company may ask you to see a physician or go to a clinic. The insurance company bears the cost of the exam (although, of course, such administrative costs are built into the cost of the insurance policy you purchase).

What “high risk” means

Insurance companies are concerned about a number of highrisk people:
– Smokers
– People with high cholesterol
– Potential diabetics
– People with indications of coronary disease
– People with a personal history of cancer or other serious disease
– People who work in high-risk occupations

If you fall into one or more of these categories, you face three possible outcomes:
– The company won’t insure you.
– The company will charge you a higher premium.
– The company will ignore the high risk (which isn’t likely).

What if I fail the underwriting?

If the company refuses to insure you because of your medical condition, first check that the medical report is accurate. Request that the company send a copy either to you (which they may not do) or to your doctor (which they will do). Go over the report with your doctor. You may be facing legitimate health concerns that you need to address. If you find a mistake on your medical report, notify the insurance company in writing immediately. Being turned down for life insurance can affect other insurance applications that you may be filing.

If the medical report is correct and the company charges you a higher premium, appeal to the agent who sold you the policy, although chances are you’ll have very little luck changing the amount. You can go to a different company, but they’re likely to discover the same problems and raise their premium as well. At that point, you either pay the higher premium or lower the face value to lower the premium. You can also try to find an insurance policy that doesn’t require a medical exam or that requires only a limited exam. (An independent agent may be able to refer you to another company.) In any case, discuss the situation with your agent to see whether the two of you can come up with a solution.