Ch. 7: Life Insurance Underwriting

A life insurance policy is a great way to financially safeguard your family’s future. But, did you know before a life insurance policy is issued to you, your application goes through a process called underwriting?

In this article, let's learn about underwriting - its meaning, types, steps involved in the underwriting process - and more.

Let's dive right in!

Insurance companies undertake a risk when they sell a life insurance policy. The level of risk can vary significantly from individual to individual. The process of analysing the risk one presents to the insurance company is known as underwriting.

Underwriting is carried out by a team of professionals at the insurance company, known as underwriters.

Underwriters are the risk managers of the insurance company. Every application or proposal is evaluated by them. Based on the financial, medical, and other details you provide, they will decide whether you are eligible to receive the insurance cover or not. If they think you pose a risk that is greater than the standard risk, they will determine the additional premium that you will have to pay.

There are two types of underwriting in life insurance -

➔ Financial Underwriting
Under this type, the underwriter will assess the financial needs of your dependents, i.e., people who depend on your income for their expenses. They will take into consideration your income, loans, liabilities, etc., and determine whether the cover amount you want to buy is in line with your needs and requirements.

➔ Medical Underwriting
Also known as mortality assessment, here, the underwriter will assess the risk you pose to the insurance company by considering factors that may affect your mortality. Some of these factors include your age, occupation, lifestyle, current health status, medical history, family's medical history, lifestyle habits that may impact your mortality, etc.

Here are some important steps involved in the underwriting process

Step 1 - Application Review
Filling the proposal form:
Your application is first thoroughly reviewed to ensure that all data provided by you is accurate and complete.

Therefore, it is crucial that you -
➔ Carefully fill out your proposal form
➔ Don’t intentionally try to hide or provide incorrect information
➔ Provide every minor detail about every disease, illness, medical condition you’ve had in the past, surgery/treatment you may have undergone, etc.

Checking your application:
Next, the insurance company will evaluate your application.

In case there is a minor update or alteration to the application, it may not slow down the underwriting process. But, if there are gaps or missing information concerning your health or medical history, the underwriting process may take longer.

Underwriting phase:
After your application is checked thoroughly, it enters the official underwriting phase.

Step 2 - Financial Underwriting
Financial underwriting will be carried out at this step. The insurance company will ask you to submit various documents to assess your financial needs and check how much cover you are eligible for. Here are some of the documents you may need to submit -

■ Salary slips
■ Bank statements
■ Income Tax Returns (ITRs)
■ Aadhar card
■ Passport, etc.

The insurance company may also ask for details of other life insurance policies you may hold. Once you submit all the documents and details of the policies, they will determine how much cover you can choose under the life insurance policy you are planning to buy.

Please note - the list of documents you may need to submit will vary across products and insurance companies.

Step 3 - Medical Underwriting
After financial underwriting, the next step involves medical underwriting. Here, the risk you present to the insurance company will be assessed based on your medical history, lifestyle habits, etc.

Undergoing medical tests:
The insurance company may ask you to provide some medical details and undergo medical checkups. These may include -

Basic tests & measurements:
Tests like Treadmill Test (TMT) and measurements like height, weight, blood pressure, etc.

Blood test:
This will help determine whether you have any potential health problems such as diabetes, cholesterol and low haemoglobin, heart disease, and so on.

Drug test:
This includes a urine test that will be conducted for a drug panel. This test will inform the underwriter of any drug usage, smoking, alcohol intake, etc.

Other tests:
You may have to undergo an Electrocardiogram (ECG) to detect any heart disease or cardiac conditions. Then, based on your age and declarations made in the proposal form, you may be asked to undergo HIV tests, X-Ray, Liver and Kidney Function tests, etc.

The medical tests you need to undergo may also depend on the declarations you make in the proposal form, any pre-existing diseases you suffer from, the type of life insurance policy you plan to buy, the insurance company you buy from, the cover amount you choose, etc.

Assessment by the underwriter:
After you undergo the medical tests, the results are sent to the underwriter for assessment. At this step, the underwriter will thoroughly go through your test results.

Request for additional documents
Underwriters may sometimes request additional documents to know more about your risk profile and lifestyle. They may ask you to submit documents like an inspection report, past medical reports, independent information, etc.

Note - All applicants may not be required to go through a detailed medical examination before purchasing a life insurance policy.

Step 4 - Final Assessment Of Your Application
After the underwriting process is complete and your medical and financial assessment is done, the insurance company will either -

Offer the life insurance policy
The insurance company will issue the life insurance policy on the same terms and premium.

Make a counter offer
Basically, if the risk assessment determines that you are at a higher risk, you may be charged a higher premium (known as loading) for the policy. This is known as a counter offer.

If you accept the offer, the life insurance policy will be issued to you.

Please note:

• The underwriting processes can be different for different insurance companies as every insurance company has a different risk-taking capacity.
• The entire policy issuance process can take anywhere between 10 to 15 days. This, however, may vary based on your profile and the insurance company you buy from.
• If you are too risky to cover, you may not be issued a policy - your application may straightaway get rejected.

Here’s a list of some risk factors that the underwriter will evaluate. Please note that these factors may vary from insurance company to insurance company.

• Age
  The premium of the life insurance policy you are going to buy will majorly depend on your age. Generally, the younger you are, the less risky you are to the insurance company. Hence, the lower your premium will be.
• Height & Weight
  Your height and weight help the underwriter in calculating your Body Mass Index (BMI). BMI can help determine whether your weight is in healthy proportion to your height. You are more susceptible to diseases if your Body Mass Index is greater. As a result, you will be a higher risk to cover.
• Current & Past Medical History
  The underwriter will also look into your past and current medical records, prescription history, surgeries or treatments, etc.
• Family’s Medical History
  Many diseases are genetic in nature. Having a family history of a specific disease or a medical condition raises your chances of contracting that medical condition later in life. So, in order to gain a thorough picture of your health, the underwriter will also look into the health history of your immediate family.
• Occupation
  Your job is another factor an underwriter will consider in the underwriting process. If you have a risky occupation, for example, if you work in an underground mine or as a firefighter or a construction worker, you will be deemed riskier than someone who works in an office.
• Lifestyle Habits
  Last but not least, your lifestyle habits will also be evaluated during the underwriting process. The underwriter will want to know if you smoke, take drugs, narcotic substances, or drink alcohol on a regular basis. Because smoking, drugs, and alcohol consumption can result in complicated, life-threatening medical issues. As a result, you may either be charged higher premiums or your application may get rejected altogether if you smoke, consume alcohol, etc.
  
  Also, if you frequently participate in activities such as skydiving, paragliding, and other extreme sports, you may be considered a high-risk applicant.

Before a life insurance policy is issued to you, it is underwritten by the insurance company’s underwriters. Underwriting is the process of assessing the risk you carry for the insurance company. The process of underwriting is carried out by underwriters. There are several risk factors that the underwriter will evaluate in the underwriting process, like your age, occupation, medical history, lifestyle habits, family’s medical history, and so on.

When you apply for a life insurance policy, you will be asked to fill out a proposal form, where you will have to provide details related to your finances, medical history, etc. You may also need to undergo several medical tests. These details and your medical test results will then be used by the underwriter to assess the risk you carry. You will also have to submit various documents and details of any other insurance policies you may hold. Based on these, the cover amount you can opt for under the policy will be determined.

After all these steps are completed, the insurance company will issue the life insurance policy to you if the risk is found to be insurable. If not, they will make a counter offer based on the underwriter’s evaluation. Or, they may reject your application altogether if they find the risk too high to cover.