Life Insurance Underwriting: How it Works and What You Should Know

Life insurance applications usually take two to six weeks for approval. Within this time frame, the insurance application will be undergoing the underwriting process - the process by which insurers look at the many factors that will determine how much of a financial risk an applicant poses to them, and thus how much they will have to pay for life insurance coverage.

But what exactly is life insurance underwriting? What kind of information do underwriters check? How long does the life insurance underwriting process take? And how does it impact your premium rates?

Let’s dive in and learn more about the underwriting process.

What is Life Insurance Underwriting?

Underwriting is a critical process that determines whether an individual qualifies for a policy and at what cost. It’s the method insurers use to evaluate an applicant's risk profile, ensuring the premiums align with the level of risk the policyholder presents. Underwriting involves a detailed analysis of factors like health, age, occupation, lifestyle habits, and even your familial medical history. For example, someone with a clean bill of health and no risky habits may qualify for lower premiums, while those with chronic illnesses or high-risk hobbies might face higher rates or additional policy restrictions.

This process is not only essential for insurers to manage their risk but also ensures fairness by offering customized rates based on individual circumstances. Advances in technology and data analytics have made underwriting more efficient, enabling insurers to provide quicker decisions and personalized options. Whether applying for term, whole life, or other types of insurance, understanding underwriting can help individuals take proactive steps to improve their risk profile and secure better life insurance coverage. In short, the life insurance underwriting process is the backbone of an insurance company, balancing the needs of policyholders with the financial stability of insurers.

Life insurance is a contract between you and an insurer. If you pass away, the insurance company issues a death benefit aka a life insurance payout to your beneficiary. Basically, when you buy a life insurance policy, you transfer the financial risk of your death to the insurance company. In exchange, you agree to periodically pay them a certain amount, called the premium.

How do life insurers set the premiums? They use a process called underwriting.  Underwriting helps insurers figure out the financial risk a person poses to them. Underwriters gather key details about an applicant and then use an actuarial table to calculate how long they are likely to live. By determining a person’s life expectancy, the insurer can then calculate an appropriate premium rate for their life insurance policy.

For example, the life expectancy of a male is 81.7 years. That means, on average, a 40-year-old male would have 41.7 years left to live.

Similarly, the life expectancy of a female is 86.1 years, meaning a 55-year-old woman is likely to live for 31.1 more years.

Each life insurer will have its own sophisticated life expectancy tables that they use to determine rates. Of course, not every man aged 40 will live up to 81.7 years, and not every woman aged 55 will have a lifespan of 86.1 years. Many factors, besides age and gender, affect mortality, including:

• Health

• Family’s medical history

• Smoking status

• Occupation

• Financial status

An insurance company will try to collect as much information as possible about you and your health. This helps them compare your life expectancy with that of an average person of your age and gender and charge you the correct premium rate.

What is the Life Insurance Underwriting Process and How does it work?

The underwriting process involves collecting a lot of medical and personal information about you. Most life insurance applications ask about your:

• gender

• age

• medical history

• mental health

• family history

• occupation and hobbies

• travel history

If you are applying for a traditional life insurance plan, you will also have to undergo a medical test. A paramedical exam helps the life insurer:

• confirm whether the information provided in the life insurance application is true

• know your full medical history

• detect any underlying health conditions that you might not have declared or be aware of

A life insurance medical exam is usually nothing more than a routine health check-up. It involves taking your blood pressure, weight, height, and pulse readings, as well as collecting blood and urine samples. If you are over 50 years old, or want a life insurance policy from life insurance companies with a large death benefit, an electrocardiogram test may also be required. Some life insurers may also ask older men to take a prostate-specific antigen (PSA) blood test. It is primarily used to screen for prostate cancer.

The examiner uses your height and weight readings to calculate your BMI. On the other hand, the blood and urine samples help to screen for a variety of different conditions.

If you have an underlying health condition, the underwriter may request for an attending physician statement (APS). An APS is a form that the insurer requests your doctor to fill out to get a summary of your medical history from their point of view. Specifically speaking, your provider will request your attending physician to share information regarding your health condition, prescriptions, and prognosis. An APS request could prolong the underwriting process by a couple of weeks or even longer.  

In addition, a life insurance company may also check your driving record to determine whether you are high-risk. A poor driving record could cost you more money or even make you ineligible for life insurance.

Underwriters use the collected information to assign you an appropriate risk class. Your risk class, together with your gender and age, helps them set your premium rate.

What are Life Insurance Risk Classes?

Risk classes are categories that group applicants by their overall health, lifestyle, and habits. They allow insurers to assess the level of risk an individual brings to the table. Think of it as a way for a insurance company to estimate how long you’re expected to live—and therefore, how long they’ll collect premiums before potentially paying out a death benefit.

Life insurers typically use the following risk classes: preferred plus, preferred, and standard. While the general criteria for these classes are pretty much the same across the board, each insurer may have some specific requirements. Any applicant who does not fit into any of these classifications is likely to get a sub-standard rating.

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Understanding the Life Insurance Risk Classes

When applying for life insurance with life insurance companies, you’re typically grouped into a specific risk class. These classes help insurers determine your premium costs, based on how likely you are to file a claim. In simple terms, the healthier and lower-risk you are, the less you’ll pay for coverage. Let’s break down how these classes work and what factors influence them.

Preferred Plus

This is the best health classification applicants can get. To qualify, you must be in excellent health and have an ideal BMI and a perfect lifestyle. Moreover, you should not have any:

• history of tobacco use in the last three or five years

• family history of heart disease and cancer

• DWI (or more than two moving violations in three years)

An insurance company will reward preferred plus policyholders with the lowest rates.

Preferred

People who fall into this class have a similar profile to those with a super-preferred classification. They are considered in good health, outside a few minor factors, such as high blood pressure.

Applicants with underlying health conditions can also receive a preferred rating if their condition is well controlled. For example, if you are managing your diabetes well and do not have any other health issues, insurers may offer you a preferred rating. This rating comes with slightly higher premiums than the preferred plus.

Standard

Most applicants are assigned to this class. A person in the standard risk class generally has a higher BMI, an average life expectancy, and potential health issues. This classification does not require a perfect driving record, nor is it as strict toward smoking as the previous two. You can qualify if you have not smoked for 12 months (as opposed to three to five years).  

Substandard

An insurance company will use a table rating system of numbers or letters for classifying applicants rated as substandard. Policyholders in this class tend to have serious health issues, such as Type 1 diabetes, severe asthma, bi-polar disorder, multiple sclerosis, and epilepsy. The greater the tabled rating (2, 3, 4, A, B, C, etc.), the higher the premium rate will be.

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Why do Life Insurance Risk Classes Matter?

Your risk class directly affects your premiums. For example, someone in the Preferred Plus class will pay significantly less than someone in the Substandard class for the same coverage amount. Understanding where you might fall and how to improve your standing—like quitting smoking or addressing health concerns—can make life insurance more affordable. By assessing risk, an insurance company can offer fair and tailored pricing, ensuring that lower-risk individuals pay less while those with higher risks contribute appropriately to the pool.

For applicants, understanding risk classes can help them make informed decisions about their coverage. For example, someone in the Preferred Plus class will pay significantly lower premiums than someone in the Standard or Substandard categories. Knowing what influences your risk class—like quitting smoking, improving fitness, or managing chronic conditions—can help you take steps to qualify for better rates.

From the insurer’s perspective, risk classes ensure financial sustainability. By categorizing applicants accurately, they can balance premium collections with potential payouts, protecting life insurance companies and other policyholders from undue financial strain.

In short, risk classes are the way an insurance company can balancing fairness and profitability. By knowing what influences these classes, you can take steps to secure a better rate and protect your loved ones at a cost that fits your budget.

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How Long Does Life Insurance Underwriting Take?

The underwriting process could take anywhere between a few days to over a month. How much time an insurer needs to make a decision depends on two things:

• how much information the underwriter needs

• how long it takes to gather all the necessary information

A simple health history is likely to get you quick approval. But if your health profile is complex and the insurer requests an APS, it could delay the decision by at least a few weeks. Generally speaking, most life insurance applications are approved within two to six weeks.

What Factors are Life Insurance Underwriters Checking for?

Life insurance underwriters evaluate a variety of factors, including an applicant's health, lifestyle, familial medical history, occupation, and financial background, to assess risk and determine coverage eligibility and premiums. This comprehensive review ensures that policies are tailored to individual circumstances while balancing the insurer's risk exposure and the applicant's needs.

Medical History

Life insurers prefer healthy applicants, but that does not mean people with health issues will not receive coverage. However, they will have to pay higher premiums to compensate for the additional risk.

Medical history is an important component of the life insurance underwriting process. Your health history includes both your personal medical history and family medical history. While the former tells the insurer about any health problems you have ever had, the latter helps them identify applicants with a higher chance of developing health conditions like heart disease, stroke, high blood pressure, and more. A poor personal or family medical history can raise your premiums.

You can expect questions similar to these when you apply:

1. Do you have any history of high cholesterol, heart disease, diabetes, high blood pressure, or other vascular diseases?
2. Have you been hospitalized in the last two years (including psychiatric admission)?

Lifestyle Habits

A poor driving history could bump up your rates, as could alcohol and drug abuse or a dangerous occupation or hobby. A life insurance company can look at your lifestyle choices to determine if the life insurance company should:

• charge you the standard rate

• include an exclusion (like death due to a dangerous activity)

• offer you coverage

Common lifestyle-related questions on a life insurance application include:

1. Have you had a reckless driving or DUI conviction in the last five years?
2. Have you participated in a dangerous activity like rock climbing, car or bike racing, or scuba diving in the last five years?

Financial Information

Wondering why a life insurance company might care about your financial health? There are two good reasons. One, they want to ensure you can afford the premiums. Two, they want to make sure you are not over-insuring your life. If you are applying for more coverage than you would reasonably need, an insurance company can reject your request.

Here are some of the questions insurers may ask you:

1. What is your total yearly income?
2. What is your net worth?  

Conclusion

Underwriting is a vital process that ensures fairness, accuracy, and financial stability for both insurers and policyholders. By evaluating factors like health, lifestyle, and financial background, underwriters can tailor policies to reflect an individual's unique risk profile, offering appropriate coverage and premium rates. This thorough analysis allows insurers to responsibly manage their risk while providing applicants with the security and peace of mind they seek. For individuals, understanding the underwriting process empowers them to make informed decisions and potentially improve their eligibility for better rates. Ultimately, Underwriting is the foundation of a system that balances personalized coverage with the sustainability of the insurance company as a whole.

Underwriting is an important part of the application process. It helps the insurer assess your risk and assign you a premium rate that is accurate for you. While you cannot do much about certain factors that underwriters take into account, like your age and gender, some things are in your control. If you are actively working to improve your health, you can receive a preferred or a preferred plus rating, which would mean lower premiums. Speak to an expert at Dundas Life to learn more about how you can minimize your life insurance premiums.

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