In the corner of a quaint cafe, your insurance agent tidies up the documents that he has just gone through with you.
You complete the proposal form and pass the first month’s premium to him.
Not so fast.
Your agent informs you that your policy’s validity is subject to his company’s underwriting.
He says that is the standard process and everything needs to be approved.
It does not help – the warm, fuzzy after-purchase feeling is gone.
You are feeling slightly confused about this whole underwriting thingy.
What is underwriting?
It is a process whereby the insurer (insurance company) evaluates the risk that you are proposing and decides whether to accept, decline or modify the terms of acceptance.
Why am I a risk?
If the policy is approved, the insurer stands to pay the compensation when something bad happens to you.
Thus, you are a potential chance on which the insurer may lose money.
What are the factors being considered for underwriting?
Different insurers may consider different aspects in their underwriting so there is no singular all-encompassing list.
The common things that may be considered for life underwriting are
– age and gender
– height and weight
– proposed cover amount
Why are the insurers doing this?
I am young, healthy and do not smoke.
Two major reasons – misrepresentation & adverse selection
Misrepresentation was explained here before so feel free to refer to that.
Basically, it is dishonesty in providing information.
Adverse selection occurs when those with a higher tendency to claim seek coverage more than those who without.
For example, out of all the 30 years old female non-smokers out there, there may be only 500 of them who are having a particular health problem.
These 500 people are the ones who will be more active in seeking insurance coverage as they need it more.
However, if the insurer takes them in at a standard rate, the insurer is bound to lose money due to bad underwriting.
The insurer may request for a medical examination.
If you have any pre-existing condition(s) or whenever the insurer feels that it is necessary, you may be asked to visit one of their panel doctors for a medical check-up.
You will have to turn up or else your proposal for insurance can be declined or modified.
What modifications are you are talking about?
One common way is to place exclusions into the policy.
For example, if you have pre-existing health issues with your kidneys, you may be excluded for any kidney-related illness coverage.
The insurer may also increase your premium and/or offer a reduced coverage amount.
It will be up to you to accept the changes.
On rare instances, they may impose a lien.
This would mean a reduced claim payout within a specified time period.
For example, if you fall into the substandard-life (less than ideal health condition) category, the insurer may pay a reduced amount within the first 10 years of coverage.
So underwriting is all bad to me?
Not entirely true.
All the above may sound negative.
However, if you are a healthy person, you should like it.
By having proper underwriting process, the majority of the population that are of standard life will enjoy lower premiums across.
Whenever the insurer makes a loss, you can imagine that they will increase the premium rate.
If you have already purchased your policy, good underwriting process will not leave your insurer exposed to bad claim payout.
Therefore, you may enjoy a better life bonus returns from the insurer on your policy.
Concise poem-like summary
Underwriting is a necessary evil.
You don’t like it. Your agent hates it.
However, insurers cannot do without it.
You just have to accept it.
(this isn’t a proper poem by any stretch of the imagination, but just give us points for trying)
www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.