What is the underwriting process in life insurance?
Learn how to simplify the underwriting process for life insurance with these easy steps.
Home / Life Insurance / Underwriting Process in Life Insurance
In India, life insurance is an essential financial tool that provides peace of mind and financial protection to individuals and their families. However, before obtaining a policy, it's crucial to understand the life insurance underwriting process. This process is the backbone of the insurance industry and involves assessing an individual's risk and determining the appropriate premium for coverage. In this guide, we'll take a comprehensive look at the life insurance underwriting process in India, including the factors considered, how it works, and how to obtain the best policy for your needs. Read on to learn more.
What does underwriting mean in Life Insurance?
If you're applying for life insurance, the underwriter will evaluate your risk profile through a process called "Life Insurance Underwriting." This procedure considers many factors that could influence your insurance premiums, and other factors.
The underwriting phase for life insurance starts after you submit the application. It involves determining the appropriate coverage level and policy premium. An underwriter is assigned to your application to determine your risk profile. This allows the insurance company to adjust the premium and coverage as necessary.
Underwriting for life insurance involves a comprehensive evaluation of factors such as age, gender, medical history, lifestyle, interests, and financial stability and is based on actuarial calculations of mortality rates, which is a standard practice in the insurance industry.
Who is an insurance underwriter?
An insurance underwriter is someone who works for an insurance business and whose job is to determine whether or not the premium being given is sufficient compensation for the risk being taken on the insured's life or health.
Therefore, an underwriter's primary duty is to check the applicant's information and supporting documentation for inconsistencies and determine if the applicant is suitable for the insurance policy they have requested. They can request medical exams or look into your background to underwrite a policy for you if necessary.
Life Insurance underwriting types
The life insurance industry uses several distinct underwriting methods. Learn about the many forms of life insurance underwriting by reading the advice below.
1. Financial underwriting
Financial underwriting in life insurance is the process of evaluating an applicant's financial status to determine the risk of insuring them and to classify them fairly so that appropriate premium rates can be charged.
During the underwriting process, the insurance company will review the applicant's financial information, including their net worth, salary, and other financial obligations, to confirm that they are buying an appropriate amount of coverage.
In life insurance, the ability to pay the premium on time is verified throughout the underwriting process. As a result, applicants for insurance receive policies based on their ability to adhere to the payment schedule.
The following insurance documents are essential for a financial underwriter to review.
Proof of Income
Salary certificates, Form 26AS, or Income Tax Returns or TDS certificates
Financial documents include credit card or bank statements, CIBIL scores, etc.
Profit and Loss Statement, Memorandum of Agreement, Board Resolution, etc. of the Company.
Additional identifying documents
A copy of the Permanent Account Number (PAN) card
A copy of the Aadhaar card
A copy of a recent utility bill (gas, water, electricity, or telephone).
2. Medical underwriting
All aspects of an individual's health and medical history are taken into account throughout the medical underwriting process (if any). After thoroughly evaluating the applicant's health, the underwriter grants coverage for the policy.
The insurer's premium would be loaded or set at a greater rate than usual if their health risk was high. If the health risk is particularly significant, the insurer may delay or decline coverage. There could also be a waiting period or an exclusion clause in more high risk situations of individuals .
A health insurance underwriter will ask for information like.
Pre-existing diseases
A doctor's prescription
Tests and samples from diagnostic testing
A medical examination report; and, when applicable, a family medical history
A policyholder should be honest about their details in order to ensure a smooth and timely underwriting process. Being truthful allows the insurance company to accurately estimate their risk profile, and thus the premium they will have to pay. It also ensures that the claim is not denied at a later stage due to incorrect information provided during the underwriting process. By providing accurate information, policyholders can expect fair pricing and no surprises in the future.
What is the step-by-step process of underwriting?
The insurance underwriting procedure involves the following steps.
Step 1: Proposal form review
The insurer will review the completed proposal form for accuracy first. This form requires careful completion.
The insurer verifies the supporting papers.
The underwriting procedure follows verification of the application's details.
When you apply for an insurance policy, the underwriter evaluates your financial stability to see if you can afford the premium.
Step 2: Medical examination
If your insurance policy needs verification of your health, the medical exam results will be reviewed.
The underwriter evaluates the medical reports, which may include the results of a blood test, a drug test, and some basic measures (height, weight, and body mass index), before deciding whether or not to approve the insurance policy.
Step 3: Final approval
The underwriting procedure may take between three to eight weeks.
Once all the information has been verified, the insurance application is either accepted or denied.
If the application is accepted, the premium and policy are confirmed.
How much time does it take to underwrite a policy?
Mostly two to eight weeks may pass during the underwriting procedure for life insurance. The underwriter checks the details you've provided in the proposal form to ensure you can afford the premium. If you are honest about the information you provide, the insurance company can authenticate your coverage and the premium smoothly. Consequently, be forthright while communicating with insurance providers.
What are the outcomes of underwriting?
When applying for life insurance, your application goes through an underwriting process where the insurance company assesses your risk level. There are four possible outcomes of this process: acceptance, postponement, rejection, or counteroffer.
Acceptance
When the risk is considered typical, the insurance application is accepted without charging any additional premium.
Postponement
High but only temporary risks may be postponed in life insurance policies until they diminish or are eliminated.
Rejection
If the risk is too great, the insurance coverage will be denied.
Counteroffer
If the insurance company deems the risk too high at the current rate, they may offer a counterproposal. This could include a shorter policy term, a lower sum assured, a higher premium, a waiting period, or temporary or permanent exclusion.
Warning signs from underwriters
Underwriting standards for life insurance vary from company to company, but there are some universal parameters that most insurers follow when looking for "red flags." Insurers may respond to these potential dangers by decreasing their coverage, charging more premiums, or rejecting an application for life insurance.
Among the most important reasons for rejecting a life insurance application include a smoking history and a diagnosis of potentially fatal diseases like diabetes, heart disease, cancer, HIV/AIDS, or a blood-borne illness. Other factors that can lead to a rejection may include the following.
Obesity: In most cases, an insurer would request further medical documentation if a policyholder has a body mass index (BMI) of 40 or above. A high body mass index (BMI) is a common reason for application denial.
Uncontrolled blood pressure: Life insurance companies may deny coverage if you have high blood pressure unless it's controlled with medication. Negative reactions might result from inappropriate or unmanaged stress.
Travel: Insurance companies may refuse a policy if the policyholder wants to visit a dangerous or unstable country.
Alcohol use: The more alcohol you consume than the usual person, the higher your premiums will be. The application could be rejected if the applicant has been drinking heavily.
Drug use: Use of narcotics will result in a rejection. Each insurance company has its policy on marijuana use.
Dangerous hobbies: If applicants engage in high-risk hobbies like skydiving or auto racing, they may be charged far more for insurance or may be denied coverage altogether.
Risky occupation: Applicants with high-risk employment, such as pilots and police bomb specialists, may need to seek coverage via speciality carriers or employer plans.
Applicants with poor driving record: Some insurance companies might turn down an applicant with a history of dangerous or drunken driving.
Does having a medical condition mean automatic rejection of life insurance?
Having any of these conditions is not an automatic denial of insurance. Nonetheless, you could have fewer options and a higher insurance cost. But bear in mind that as medical science progresses, other choices may become available. In those days, a person with an HIV diagnosis couldn't acquire medically underwritten insurance. However, the IRDAI has recommended insurers to add coverage for HIV by directing them to issue health insurance policies designed specifically for individuals suffering from HIV.
What to do if you are at a higher risk of rejection?
People are accepted for coverage despite having a minor or easily managed health condition. You have two primary choices if your medical history or current health concerns make it likely that you will not "pass" a mandatory medical examination.
One option is to apply for a Guaranteed Issue Life Insurance Policy, which requires no medical exam and is underwritten with a shorter application. Guaranteed Issue Life Insurance Policy is characterised by higher premiums and reduced coverage limits. Most people don't need them, but they could be useful if you can't get regular life insurance.
If you are employed, another choice is to enrol in a Group Life Insurance Plan provided by your employer. Group insurance typically has lower premiums and sometimes doesn't even necessitate a physical examination (unless you apply for coverage over a certain limit).
Frequently Asked Questions (FAQs)
Here are some common questions about life insurance underwriting.
Is there any fee for life insurance underwriting?
No, the life insurance underwriting process is free for applicants.
What are the four risks as categorised by life insurance companies?
Life insurance companies categorise risks into four types: standard, preferred, substandard, and declined.
What is verbal/tele-medical underwriting?
Verbal/tele-medical underwriting is a process in which the tele-medical team of the insurance company uses a video call to verify the information provided in a proposal form.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.
