Underwriting – Changes Coming

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by Steve Goodman

CPA, MBA – President & Chief Executive Officer

Contact Steve today for more info.

Underwriting is a process by which a financial institution evaluates the risk associated with insuring or lending to an applicant. In the case of life insurance companies, companies are taking a calculated risk on when they will need to pay a death claim. The industry has collected an enormous amount of data over the last few centuries. They have expectations about the claims they expect to pay based on a number of factors. Among the factors considered are the applicant’s age, gender, health status and habits, family health history, and whether or not the applicant participates in dangerous hobbies or works in a hazardous occupation. Insurance companies collect this data on applicants to assign a risk category to each applicant. Those in the least risky category pay the lowest rates.


Insurance applicants must remember that any quote received for a policy that is not ‘guaranteed issue’ is subject to underwriting. The underwriting process will typically include multiple evaluations including medical, lifestyle, and financial.


Applicants provide all this information to the insurer on their insurance application and health questionnaire. In addition, the insurer will require a health examination, as well as agree to the preparation of a Medical Information Bureau (MIB) report and the request of information from the applicant’s doctors.


The life insurance application process is extensive. It can take from 30 to 60 days or longer and may sometimes seem invasive. A face-to-face paramedical examination is required, which will require providing blood and urine samples. Applicants can expect detailed questions regarding their lifestyle, intended foreign travel destinations, and personal and family health history. Sometimes, multiple interviews are required to verify the information. The examiner will usually ask these questions in a face-to-face interview and the insurance company may also conduct follow-up telephone interviews.


Most life insurance companies will require an applicant to meet certain guidelines regarding their lifestyle and medical history in order to place the policy. If an applicant provides misleading information in the application, the policy can be voided when a claim is filed. Providing false information on an insurance application is considered to be fraud.


There are various levels of underwriting — including full underwriting, simplified underwriting, and guaranteed issue — that will impact the premium to be charged. Applicants should be sure to ask which type of underwriting will be used for their policy, what kinds of medical information they will have to provide, and what type of health examination they will need to undergo. The insurance company pays for the entire underwriting process, including the medical exam.


A single applicant can obtain a different risk rating from multiple insurance companies. Companies create applicant risk scores based on a weighted average of the information they collect. As a rule, most of the larger insurance companies run through a similar underwriting process that yields similar, but not always the same, results. An applicant with medical related issues may benefit from providing medical information to multiple companies. The insurance companies can provide an unofficial medical rating allowing the prospective applicant to know where to apply. Formal application ratings are shared with insurance databases. An applicant does not want a low medical rating in his history if at all avoidable. Unofficial inquiries are not submitted to industry databases.


Some insurance companies offer ‘guaranteed issue’ policies that do not require a medical exam. The hidden cost of this feature is that such policies attract those likely to receive a high-risk score on their health evaluation. Insurance companies know this and price these policies accordingly.


Life insurance companies classify applicants into risk categories. While individual companies may have their own names, the common industry nomenclature, from most preferred risk to least preferred risk, is as follows:


  • Preferred Plus
  • Preferred
  • Standard Plus
  • Standard
  • Substandard


There are also multiple categories for people rated substandard. The substandard ratings range from Table A, the best, to Table D, E, or F, depending on the insurance company. Lower-rated classes may be uninsurable at any price. Companies price their policies, in part, based on the risk category of the applicant. Insurance companies commonly share applicant ratings with insurance databases making this information available to other insurance companies.


Life insurance underwriting is in the early stages of considerable change. The changes are most evident in newly founded companies in the life insurance business. Venture capital-backed firms have found a niche in what they believe to be inaccurate industry medical and lifestyle assessments. The information age offers companies a continuous stream of data to confirm that people are leading a lifestyle worthy of beneficial rates. Those who engage in regular cardio workouts, eat vegetarian or vegan, have a low resting heart rate due to exercise, and other factors may benefit from these smaller insurance companies.


These companies have computed the statistics creating risk classes that reflect lower rates than the best rates offered by traditional insurers. These companies may also evaluate a person with controlled chronic disease, such as Type II diabetes, better than traditional insurance companies. These new insurance companies are using the information generated by home medical and athletic reporting equipment to justify improved risk evaluations. Applicants are advised to read the terms and conditions of these policies thoroughly.



CPA, MBA – President & Chief Executive Officer

About Steve Goodman

For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.

He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.

Email Steve today for the business succession planning you deserve.

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