The Underwriting Process
Underwriting is the process of risk selection – the process of reviewing many different characteristics of an individual to figure out whether the person is insurable (i.e. whether the insurance company can afford to take the risk of selling someone life insurance) and… if the person is insurable, then the insurance company must know what risk that person poses to the insurance company.
These risks are formally classified and are referred to as “risk classes”.
But before we delve into risk classes… where did all this underwriting business come from and why is it important?
Let’s start with that…
A Brief (And Somewhat Interesting) History Of Underwriting
So… it all started a long time ago in a land far, far, away… called “Europe.”
You have maybe heard of this place?
There was this dude in England named Ed Lloyd, and he owned this cool coffeehouse that served more than just coffee. It just so happened to be a favorite hang out for merchants in the late 1600s, and… became so popular with investors that Ed Lloyd’s later became “Lloyd’s Of London,” which still exists today and is sort of like a stock exchange… except that it’s for insurance instead of stocks.
Shipping was just beginning between the New World and Europe. Colonies were maturing and they, of course, wanted to trade for exotic goods. But… problem. Sailing from Europe to America was risky. Very risky.
Merchants had to take all these spices and a bunch of other stuff to America and a lot of them didn’t make it there. And even if they made it there, many of them didn’t make it back.
Back then, there was a basic way for funding voyages to America. Merchants and companies would ask for monies from venture capitalists. The venture capitalists would then find people who wanted to be colonists in the New World and would buy provisions for them and for the trip.
The would-be colonists basically worked for the venture capitalists (investors).
In exchange for paying for the trip, the merchants agreed to share some of the profit generated from the goods the daring young colonists would produce or find in America (i.e. a return on investment).
So, for example, an investor might pay for a trip to America but only on the condition that the merchant and the investor’s paid-for colonist would find or grow tobacco or some other valuable good. The investor would then get a cut of the profit on the tobacco plus his original investment back.
Once the merchants had their funding from the investors, they would go to Ed Lloyd’s place and give the investors a copy of the ship’s cargo, called the “manifest.”
Running a ship on the high seas was dangerous and so merchants also wanted protection if they happened to lose their cargo. Investors also wanted some protection since they had a lot wrapped up in these deals.
Sooooooo… other investors would occasionally agree to take on the risk that the ship would sink or that the cargo would otherwise be lost. They would charge a “premium” for these services.
These investors would sign the bottom of the ship’s manifest (where all cargo was itemized), beneath the items they agreed to take responsibility for. They “underwrote” specific items on the ship, agreeing to pay for them if anything happened to them at sea and became known as… underwriters.
A ship might have several “underwriters,” which allowed merchants and investors to spread the risk around so that no one investor or underwriter would suffer a huge loss.
But… they had no way to truly understand the risks they were taking.
It wasn’t until 1654, when Blaise Pascal invented the first calculator, and Pierre de Fermat discovered a mathematical method for expressing probabilities, did the concept of “risk selection” become possible.
Pascal’s triangle was the next major discovery in risk management, which allowed mathematicians to create the first actuarial tables in Europe. These tables were used to help make insurance more affordable. But… they did not help in every area of insurance.
Life insurance struggled because the risk being insured was difficult to predict and what was really needed was an observation of birth and death rates.
It wasn’t until 1760(ish) that the first mortality tables were created, using primarily death rates and some birth rates. Before then, some rudimentary mortality tables existed which only included death rates, which were compiled by an English scientist, Edmund Halley, for the city of Breslau, Germany.
Mortality tables continued to be refined over time until…
In 1900, a professor, and professional actuary, by the name of Levi Meech, created one of the first standardized mortality tables using census data. There was some criticism about the methods he used and some professionals questioned the accuracy of his work and… his research and tables were eventually overhauled and better mortality models were created… models which life insurance companies use today to underwrite life insurance policies.
And now you know.
The Basic Underwriting Process
This is where it gets real.
Underwriting usually involves a formal medical exam (complete with a blood draw, urine collection, and possibly other medical tests) plus a personal or phone interview to verify your identity, health, and financial status.
However, this process is quickly changing. Some insurers are moving to non-medical exams for fully-underwritten policies. More on that in a moment.
Why Life Insurance Is Underwritten
Just like the underwriters in the 1600s, no one wants to take on a risk without being compensated. Life insurance companies are no exception. Underwriting is a way for insurers to quantify or objectify the risk they’re taking.
Basically, the life insurance company wants to know that you are really you (and that someone’s not trying some elaborate scheme to steal your identity), that you’re healthy enough to qualify for insurance, and that you have the financial means and ability to pay for it.
If the insurance amount is large enough, the insurer also wants to make sure that the insurance amount makes sense. They are taking on a bunch of risk underwriting a policy, so they want to make sure that you actually need the amount you’re applying for.
All the data they collect is used to determine your risk class and premium rate for your policy.
Underwriters use several sources of information to help them build a risk profile on you. The number of the sources they check depends on a few factors, including the amount of insurance you want and your health status (how healthy you are).
The larger your policy, the more thorough the insurance company will be.
The application is where it all starts.
The Application Process
When you apply for life insurance, you are making the insurance company an offer. The application is the basic source for all the information the insurer will collect on you.
There are three basic parts to most applications. The first part is a general information collection form. The second part is a health or medical questionnaire. The third part is the agent’s or broker’s report.
Part I of the application will ask you about the basics: your name, age, telephone number, Social Security Number, address, date of birth, your sex, marital status, and where you work or what you do for a living.
The application also asks you about the amount of insurance you want to buy, the type of policy, the name of your beneficiaries, and other insurance policies you own or applications you have pending with other insurers.
The insurer may also ask about your hobbies and whether you engage in any dangerous activities like auto racing, cliff diving, sky diving, rock climbing, and so on. The insurer wants to know if you travel a lot, if you are a pilot, or if you’re currently on active duty in the military.
And… oh yes… they want to know if you smoke or use tobacco products of any kind.
The second part of the application is about your health and will ask you about your health history, your family’s health history, and about any medical problems you are currently being treated for. It will ask about medications you’re currently taking as well as any vitamins or other supplements you’re taking.
Part III is the agent’s report. The agent’s report is where the agent reports personal observations about you.
Agents will report to the insurer anything that seems out of the ordinary because the agent works for the insurance company and serves the insurer’s interest.
The Medical Exam And Report
All policies are issued based on the health and financial status of the person being insured and the policyowner.
But… the health or medical exam is one of the sing-most important factors for the insurance company. Most companies have a set of non-medical limits – policy death benefit amounts they will underwrite and use to issue a policy without a full medical exam.
This process, called “simplified underwriting,” can help speed up the application process. However, it sometimes comes at a cost. Because the insurer is not doing a full medical exam, some insurers will hike the premium up to account for the fact that they are not fully underwriting the policy.
Other insurers do not do this. Most of the time, you won’t know in advance whether an insurer will charge more for simplified underwriting. Your agent or broker will tell you once the insurer makes a counter-offer.
Some insurance companies will ask for supplemental information. For example, an underwriter might ask for an attending physician’s statement (APS). This statement is obtained from your doctor (with your permission, of course). It details your medical history as well as any prescription drugs you may be taking.
If the insurer requires a medical exam, you can usually take it at a location of your choosing, provided it’s done by a qualified healthcare practitioner. The practitioner usually must be either a doctor, nurse, or nurse practitioner. The insurance company pays for the cost of your exam so you never see a bill.
How To Prepare For Your Medical Exam And What To Expect
Not all insurance companies require you to take a medical exam. It really depends on the company, the non-medical limits of the insurer, your age, etc.
However, if you’re buying a decent amount of life insurance, say over $1 million, you’re probably going to have to take a full medical exam.
There are several types of scenarios you’re going to run into:
A Non-Medical Exam
This exam is basically just a questionnaire. It includes basic information about your medical history and may include more in-depth questions about the medications you take.
A Paramed Exam
This is where a nurse collects your full medical history, including height, weight, blood pressure, and pulse.
In addition to the basic paramed exam, a nurse will also perform a general physical exam which has been ordered by the insurance company (a doctor technically orders the exam, but the insurer requests it for the insurance underwriting).
He or she will check your heart and lung function, draw a blood sample, collect a urine sample, and possibly perform several other tests depending on your age and how much insurance you’re applying for.
How to prepare for your exam:
- Make sure you have a good photo ID available (i.e. a driver’s license or government ID with photo).For all blood tests, fast for at least 4 hours before the blood draw. Ideally, you would fast for 8 hours – this will give the insurer the most accurate information. Drinking water is fine. No sugared/flavored water. No soda/pop. Not even vitamin water. Just. Water. Plain ‘ole water… from a tap or filtered water from a bottle.
- Tell the examiner about any medications or vitamins (or anything else) you’re taking. Many years ago, there was a client taking some brand of cough medicine, and they tested positive for cocaine despite never having touched the stuff. So… tell your examiner if you are taking any OTC medications (or anything else, really).
- For all blood tests, fast for at least 4 hours before the blood draw. Ideally, you would fast for 8 hours – this will give the insurer the most accurate information. Drinking water is fine. No sugared/flavored water. No soda/pop. Not even vitamin water. Just. Water. Plain ‘ole water… from a tap or filtered water from a bottle.
- For all urine tests, drink a glass of water one hour before the exam.
- Bring a list of any medications (and other vitamins or supplements) you currently take. You need to give the nurse the name, dosage, frequency, and so on. Basically, everything you take, when you take it, and how much.
- Bring the name of your attending physician, his or her address, zip code, telephone number, and the last time you went in for a visit and why.
- Schedule your appointment for the least stressful time of the day. Tests can really freak people out sometimes. Even if you love having your blood drawn and urine collected by a stranger, the best results will come when you’re calm and at peace with the world. Early morning is usually best, but choose a time you think will work for you.
- Get a solid 8 hours of sleep before your exam.
- You don’t have to take your clothes off. It’s… not that kind of exam. But, you should wear a short-sleeved shirt or something that makes it easy to draw your blood.
- I’ll try to say this in the most polite way I can… if you are over 300 pounds, please let the testing center know that you’ll need a special blood pressure cuff and a scale to measure your weight. It’s no biggie, but they have to know beforehand so they can pull the equipment if they don’t have it on-site.
- If you are a senior citizen (over age 71), you get a special Senior Exam, which will involve tests for mobility, cognitive ability, and a few other questions.
- Do not drink any caffeine (coffee, soda, tea) for at least 3-4 hours before the exam.
- Do not smoke or chew tobacco for at least one hour prior to the exam.
- Do not drink any alcohol for at least 8 hours before the exam.
- Do not use any nasal decongestants.
- Do not engage in strenuous exercise for 24 hours before the exam.
All of these things can mess up the exam results and give the insurer a false picture of your current health.
Once your medical exam is done, it’s sent to the insurance company and is reviewed by the company’s medical director or associate.
You can also request a copy of your medical report, usually at no cost to you. This will include your blood, urine, and other medical tests the insurer ordered.
Speaking of medical tests, here’s what the insurance company typically looks for:
Blood Profile and Urinalysis (Blood / Urine Exam)
A nurse or nurse practitioner will collect blood and urine from you, label it, and send it to a testing facility.
The insurance company wants to screen you for:
- Cholesterol and other blood lipids,
- Blood sugar (including HbA1c,
- Liver and kidney function,
- Illegal drug use (although they aren’t looking to report you to the police… they’re interested solely in how it impacts their ability to underwrite you for insurance).
Based on these initial tests, more tests may be needed.
The medical lab sends all results directly to the insurance company, but again, you may request a copy of those results from the insurer. Results are valid for up to 6 to 12 months, depending on the insurance company, which means you can buy multiple policies within that timeframe and not need another exam.
Your Physical Measurements
Nurse will record your height, weight, blood pressure, and pulse rate. All results are sent directly to the insurance company and you may request a copy of these results.
These results are good for between 6 months and 2 years, so you can use them again for any future life insurance purchases within that timeframe.
The medical examiner or nurse will swab your cheek and gum for 2 minutes to collect fluids for HIV, cocaine, and nicotine screening.
These results are sent directly to the insurance company, you can request a copy of them, and the results are good for between 6 months and 2 years, depending on the insurer.
Resting Electrocardiogram (ECG)
If you are over a certain age, the insurer may request an ECG. It’s painless. The nurse simply monitors the electrical activity of your heart and may also do a treadmill stress test.
The results are sent to the insurer, you may request a copy of the results, and they are good for between 6 months and 12 months, depending on the insurance company.
Rx Pharmacy Prescription Check
Most life insurance companies run a prescription check with a pharmacy database program to verify all prescription drugs you’re currently taking.
Here come the men in white coats!
No, not the Men In Black.
The Medical Information Bureau (MIB) is where insurers can collect information about your medical history (with your permission). It is a sort of data repository set up by insurance companies. But… it is also a nonprofit agency so they aren’t selling your information. It is only used by underwriters at insurance companies.
The stated purpose of the MIB is to help hold down the cost of life and health insurance (including disability insurance) by minimizing and preventing misrepresentation and fraud.
For example, if an insurance company discovers an applicant has a physical illness, the insurer can report this information to the MIB so that other insurers will be notified if that same applicant tries to apply to another insurer. This is especially useful for insurers when an applicant has a terminal or chronic illness which would preclude them from buying insurance.
Financial And Other Special Questionnaires
Sometimes, an insurance company needs more information than what’s on the standard application.
Yay! More paperwork.
When necessary, the broker or agent will help you fill out a financial questionnaire or maybe a supplemental health questionnaire. The purpose of these special questionnaires is to help the insurer better understand your financial or health status.
Sometimes, the insurer needs to know more about your hobbies, like if you’re a pilot or a stuntman or if you have a foreign residence, or if you are in the military.
Some occupations are more dangerous than others and the insurer wants to know what it’s getting itself into before it issues a policy.
An inspection report is necessary when you apply for very large amounts of life insurance. Normally, insurers will get these reports from national investigative firms. The insurance company wants to know about your general character and reputation, where you make most of your money, and whether you engage in any unusual or potentially dangerous hobbies.
Most people’s insurance needs do not trigger an inspection report.
Credit Reports And Ratings
Some life insurance companies will examine your credit report to make sure you’re not seriously delinquent on debts or have a history of defaulting on financial obligations.
Basically, the insurance company does not want you to lapse your policy because it actually costs them money (a lot of money) to underwrite you. Generally, an insurer’s expenses for issuing a policy cannot be recovered in a few years. In some cases, especially with permanent life insurance policies, it can take 10 or more years for an insurer to realize a profit. Obviously, they cannot afford to have a bunch of policyholders lapse their policies in the first 5 years.
So, if you’re a high credit risk, an insurer might decide to either charge you more money or decline your application.
Motor Vehicle Report
Life insurers verify your driving record by pulling a motor vehicle history report. Why do this? It’s all part of the underwriting process. The insurer wants to know if your driving habits are considered “risky.” It’s not the only thing they look at, but it’s another piece of the puzzle.
Life insurance companies verify all information an agent or broker puts down on the application. They do this by doing a supplemental health questionnaire on the phone with you.
These telephone interviews usually don’t take too long. Questions are used to verify information you’ve already put on the application, to collect missing details, and to gather any supplemental information the underwriter needs.
Risk Classes And Table Ratings
Once the underwriter has combed through all this data, he or she assigns you a risk class and makes an offer for life insurance coverage.
“Risk class” refers to a formal classification an underwriter makes when determining your risk profile.
Based on what the underwriter discovers during the underwriting process, you’re rated as either a standard risk, a preferred risk, or a substandard risk, and… as either a smoker or non-smoker, and… as a male or female (duh).
Standard risk is, more or less, what it sounds like. It is a “normal” or “average” risk for the insurer. Most people who buy life insurance are standard risks and thus receive the standard risk class and premium rates.
A preferred risk is a better than average risk… meaning the insurance company takes less risk than a standard risk by insuring this person. And… the person being insured pays a lower than average premium for the life insurance policy.
Insurance companies often have different sub-classes in the preferred risk classification. These include (but are not limited to):
- Preferred Plus
- Preferred Plus Select
- Ultra Preferred
A substandard risk is a risk that is riskier than a standard risk. Most life insurance companies rate substandard risks using specialized tables. These tables might be ordered “A” through “J” or “1” through “10”.
Each substandard rating corresponds with an increase in the premium rate over the standard rating.
|Table Rating||Standard Rating + (%)|
|Table A (1)||+ 25%|
|Table B (2)||+ 50%|
|Table C (3)||+ 75%|
|Table D (4)||+ 100%|
|Table E (5)||+ 125%|
|Table F (6)||+ 150%|
|Table G (7)||+ 175%|
|Table H (8)||+ 200%|
|Table I (9)||+ 225%|
|Table J (10)||+ 250%|
Smoker vs Non-Smoker
Pretty simple. If you use tobacco products of any kind, most insurers will rate you as a smoker. However, some insurers will allow you to smoke occasionally and rate you as a non-smoker.
For example, some insurers will rate cigar smokers as “non-smokers” as long as they smoke less than 10 cigars during the year. Other insurers don’t consider cigar smoking a tobacco rating regardless of the number of cigars you smoke, while other insurers will rate you a smoker if you’ve smoked just 1 cigar over the past 12 months.
Non-smokers enjoy lower rates than smokers.
Smokers in their 30s typically pay 2 to 3 times as much for premiums as non-smokers. And, smokers in their 40s and 50s pay 3 to 5 times as much as non-smokers.
Protip: if you smoke or use tobacco products… quit smoking and using tobacco products.
If you currently smoke, you can still get insurance quite easily, but you’ll pay a higher premium. That’s the bad news. The good news is you can quit at any time, and get re-rated 12 to 24 months later as a non-smoker.
A Word On “Teaser” Rates
Large online brokerages love to throw out “teaser rates.” A teaser rate is a rate that’s very, very, low and probably not one you qualify for.
For example, an online broker selling term life insurance will exaggerate how cheap term life insurance is by showing quotes for ultra-preferred risk classes. An ultra-preferred risk class rating means that you pay the lowest premium possible in the industry.
Meanwhile, most people are rated standard risk and so they will never see the online quoted premium. Some people do qualify for the best rates, but you must have perfect or near-perfect health to qualify. Basically, you will almost certainly know beforehand if you’re healthy enough to qualify for ultra-preferred. If you have any doubts about it, you probably don’t qualify.
This is a trick that’s been going on for years and, for some reason, few people have picked up on it until they get through the underwriting process and are approved.
Changing Your Risk Class After Initial Underwriting
Some insurers will rate you a standard risk if you have high blood pressure or on cholesterol meds as long as your condition is stable. Others will rate you substandard no matter how well your condition is managed.
However… most underwriting decisions are not final.
You can almost always go back later and have the underwriter re-rate you, usually at no cost to you. In order to get a better rating, however, something has to have changed since your initial rating.
If you are rated standard because of your “height and build,” it means the underwriter believes you are probably a bit overweight and need to lose weight to qualify for a better risk class.
If you are rated for smoking, and you want a non-smoker rating, then you must quit smoking and avoid using any tobacco products (including nicotine patches and other cessation devices containing nicotine) for at least 12 months and sometimes 24 months, depending on the insurer.
If you received a table rating for diabetes, you can potentially get a standard rating if you are compliant for a certain period of time and your condition improves.
If you have high cholesterol, and are rated for it, you may be able to get a standard rating or a preferred rating if you eliminate the need for medication and your cholesterol returns to normal ranges.
Accelerated underwriting is different from “simplified underwriting.”
Accelerated underwriting is a fully-underwritten policy where the insurance company uses advanced data analytics and artificial intelligence to predict your risk to the insurance company.
Usually, this results in a faster (as fast as 24 hours) and more accurate risk assessment than traditional underwriting. There is no medical exam, no blood and urine collection, and no APS, and no waiting for a result. Meaning, your policy can be underwritten and issued in as little as one day (24 hours). At most, the process can take a week. That’s the good news.
The bad news is many insurers are still struggling to figure out how to implement this on life insurance amounts over $2 million.
So, if you need more life insurance than that, you will probably have to go the traditional underwriting route.
Initial Premium and Receipts
A broker or agent will usually ask you for the first month’s premium on your life insurance policy when they take the application. Sometimes, a broker will wait for the insurer to approve the policy. This is usually done when the broker is working to get you a better risk classification than what was originally written on the application.
If you pay your premium with the application, you should receive a premium deposit receipt and a temporary insurance binder showing proof of temporary insurance coverage.
There are two basic types of receipts: conditional receipts and binding receipts.
This is the most common receipt and basically means that you have insurance as long as you meet certain conditions or as long as underwriting results in the company issuing the policy.
A binding receipt binds insurance coverage. Agents can bind insurance coverage with the insurer. Brokers typically cannot do this. A binding receipt means you have life insurance coverage as soon as you pay your premium. If you pay with the application, the insurance is in force. Most insurers do not allow this type of receipt or only allow their most experienced agents to bind coverage for them.
Binding creates additional risk for the insurer because they are obligated to provide insurance coverage, even if the applicant normally would not be approved for coverage. The insurance coverage remains in effect until the insurance company formally rejects the application.
Approval receipts are more rare in the industry and also more restrictive than most other receipts.
Coverage is effective only after the application has been approved by the insurance company but before the policy is actually delivered. Usually, life insurance companies put the coverage in force after the policy has been delivered and all delivery receipts have been turned back into the home office.
Policy Effective Date
Your policy effective date can change a few things around in your life insurance contract. The effective date is the date the policy goes into effect (duh!).
It identifies when premiums are due and when coverage is actually effective – both are things you want to know.
Some insurers let you set the effective date for up to 3 months in the future or in the past. If you set the effective date in the past, you will have to pay premiums for all months you want insurance in force, up to the current month.
Kinda of sounds like you’re cheating on your insurance company with another insurance company, doesn’t it?
Back dating is actually a very useful tool. Back dating allows you to be underwritten as though you are a younger age than you really are. Most insurers allow you to back date a policy up to 6 months or even a year. This means if you just had a birthday or if your birthday is coming up in a few months, you can ask the insurer to underwrite you as though you were a year younger.
This gets you a lower premium for the rest of your life.
But, nothing is free.
You must pay all back-due premiums and then pay your next premium on the policy anniversary date. So, if it is the end of June, and you back date your policy 6 months, you will owe 6 months of premiums. Additionally, your next premium will be due every year in January, since you back dated your policy to January (6 months from the end of June).
If you’re paying monthly, your policy anniversary is now in January and you pay 6 months of back dated premiums, then pay current premiums to December, and then start making the next year’s premiums in January.
How Long Does Underwriting Take?
For Traditional Underwriting
Traditional underwriting for most life insurance policies can take anywhere from 1 month to 3 or even 4 months. The more life insurance you buy, the more complex the life insurance plan is, or the more complex your health conditions are, the longer the underwriting process will take.
For Accelerated Underwriting
The good news is accelerated underwriting is becoming more common. As mentioned before, accelerated underwriting is fully underwritten life insurance. It uses advanced artificial intelligence and data analytics to help underwriters dramatically speed up the underwriting process.
Straightforward cases can be done in 24 hours. More complex cases can be done in a week or less.
For Simplified Issue Underwriting
Some life insurance companies can issue simple term life insurance policies in 24 hours or less. These are not fully underwritten policies and thus tend to cost a bit more than traditionally underwritten or accelerated underwritten policies.
For Guaranteed Issue Underwriting
Like simplified issue, guaranteed issue underwriting is quick – sometimes a day or maybe a few days. No medical questions means fast approval. But, again, it’s not fully underwritten and the cost is always higher than a fully-underwritten policy.