Understanding Underwriting

Life insurance companies are in the highly competitive business of selling life insurance to meet the public's needs. Before you can purchase coverage, however, you must qualify by meeting specific requirements. The process is known as risk-classification or underwriting, and it can be confusing when misunderstood.

The underwriting process helps the insurer determine the rate you will pay, based on the level of risk you pose.

Auto insurance helps illustrate the concept. Good drivers pay less for coverage than do poor drivers. Also, young drivers, who have more accidents, pay more than mature drivers. The amount of premium is based on the amount of risk.

Life insurance is similar. For instance, explains Dr. John Iacovino, Vice President and Medical Director for the New York Life Insurance Company, "a cigarette smoker presents a higher risk and has a shorter life expectancy than a non-smoker. Therefore, a smoker will pay a higher premium for life insurance than will the non-smoker for the same amount and type of coverage."

When you apply for life insurance, the company will examine a number of factors based on its underwriting standards and guidelines. These factors include:

Your current health and physical condition.
Your medical history.
Your vocation. (A race car driver, for example, presents a higher risk than a bank teller.)
Personal habits (including tobacco use and a history of alcohol or drug abuse).
Your avocations and hobbies. (Hang gliding, for example, is a high-risk pastime that could increase an applicant's premium.)
Your age. (A 50-year-old applicant will pay a higher rate than a 30-year-old). Your gender. (Except in states with unisex rates; rates for women are lower than those for men since women enjoy longer life expectancies).

How Information is Processed
Once it is received by the insurance company, explains Dr. Iacovino, "all personal and financial information is held in strict confidence. A specially trained underwriter will review and evaluate these factors and develop a risk profile of the applicant. This risk profile relates to the life expectancy of the individual and possible reductions due to medical history. The final premium is based on the risk profile and the risk of death."

It is important to remember that premiums are not set arbitrarily. There is a clear objectivity to the process, points out Dr. Iacovino, adding that "risk selection must be based on actuarial projections, medical advances and expected or anticipated claims experience."

Risk Classifications
Each insurer sets its own underwriting standards of what it considers to be acceptable, insurable risks. Then each application for insurance is reviewed to determine if the individual meets those standards. Here are four common categories:

Preferred: If you are a better-than-average risk (i.e. in good health, with no dangerous hobbies or history of health problems) you may be charged a preferred or lowest rate.
Standard: If you are considered an average or typical risk, you will be charged the standard rate.
Rated: If you pose an above-average risk (perhaps you have high blood pressure, smoke cigarettes, or engage in skydiving every weekend), you may be classified as an increased risk and charged a higher premium. (As Dr. Iacovino explains: "If you are 50 and have a heart attack, actuarial statistics may show your life expectancy to be reduced by 10 years. Therefore, you will pay the premium of a 60-year-old.")
Declined: If you are rated as uninsurable (perhaps due to a serious illness), you may be denied coverage entirely.

What are your options if you are rated or declined? The fact is, says Iacovino, that more than 90% of life insurance policies are issued as applied for. However, if you are rated or declined, remember that a rating is not always permanent. If you quit smoking, lose weight, bring down your cholesterol and blood pressure, to name just a few, your rating as an insurance risk may change and the premium reduced."

The Bottom Line
New York Life wants to do business with you. And through the underwriting process, it is possible to provide the majority of people with the coverage they need at a rate commensurate with the risk they present. A New York Life agent — professionally trained and experienced— can help you analyze your needs and recommend appropriate solution through insurance and financial products and concepts — at no charge to you. Click here to request a free, no obligation, consultation with a New York Life agent.

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