Life insurance companies do a process called ‘underwriting’. What does that entail?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Feb 28, 2009

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The insurance company asks medical, family history, lifestyle, occupation and financial questions on the application for insurance. The underwriting process is designed to ferret out and help them categorize (and thus “properly price” or eliminate) not only those people who have serious illnesses, but also various other health conditions (such as being overweight, smoking, excessive drinking, illicit drugs, etc.), or negative family histories (sometimes suggestive of increased likelihood of future illnesses, such as Huntington’s disease, etc.), and occupations (such as demolition experts, etc.), and hobbies (such as hang gliding, building or flying in private planes, etc.), or bad driving records, or being “over-insured” (relative to one’s financial circumstances and needs) which history has demonstrated is likely to be associated with increased chances of “premature death” — shorter than the normal actuarial life expectancy tables suggest. As part of that underwriting process, and depending on the size of the policy, and age of the policyholder, and other factors life insurance companies also may perform physicals, of various intensity — a para-medical exam, blood and urine tests, full physical, even a stress test by a specialist — and examine “attending physician statements” and medical charts. They ask financial questions to assess the need for the insurance. They do background checks in some cases. (Each life insurance company has its own underwriting rules, which vary significantly from company to company, and often from policy to policy.)

As a result of the underwriting process the life companies classify people, and determine which rate to charge — the lowest — “so called “Super Preferred”, Preferred, Standard, or Rated and if so how much. The cost per dollar of life coverage may be as much as 10 times higher between Super Preferreds and highly rated. And in many cases companies decide they are not willing to insure an applicant at all. The more careful a company is the lower its prices usually are.

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