Understanding 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:

• 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.
• 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.
• Your job: Some jobs are simply riskier than others. The degree to which your occupation places you into a highrisk 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.
• 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. And in some cases, the insurance company may even hire investigators who will ask questions of family members, neighbors, and friends. 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.