What is underwriting? You have heard this term from time to time when dealing with insurance or maybe even when applying for a mortgage. But what is it? In terms of insurance it is simply the name for the process of deciding what risk an insurance company is willing to take on. What is risk, you are wondering? It is the chance of a loss occurring as a result of an unfortunate consequence.
There are many factors that an underwriter weighs when considering an application for insurance. Ultimately, the insurance company will decide on an applicant’s insurability. Each individual case, or application, is put through a process and a final decision on what the insurance company is wiling to do is made. Always keep in mind that if you are working with an insurance agent that person may never guarantee a policy’s issuance or how it will be issued.
The items that an underwriter will use to consider your application are the application forms themselves, a physical exam, information obtained by various consumer reports, an attending physician’s statement, and an inspection report. Different cases require different underwriting requirements, so not all cases require any or all of these items listed here. However, when the case applies, and depending on the amount of insurance applied for, usually higher amounts, the insurance company may want to have an inspection report be done to verify things like, verifying a person’s character and reputation.
The underwriter will eventually be able to match the proposed insured to a risk classification. This is a grouping of people of similar insurability. You may have heard of the common names of these groups such as, Standard, Preferred, Non-Smoker and Smoker, to name a few. Someone who has been deemed a substandard risk may still be able to obtain insurance coverage. They will get it based on being a higher risk. The health implications of someone who is a smoker will allow for the company to apply a higher rate and therefore, charge a higher premium for taking on their risk.
There are different ways that companies figure out the extra amount due for a substandard risk. One example is the insurance company may apply charges based on something called the “health age” of an applicant. But, a more common way of assessing a higher rate, and therefore premium, is the Tabular Rating Method. With this way, tables are created and utilized by the insurance company to apply the proper percentage more of premium that would be due. This can range from approximately 25% higher to maybe 400% higher, which would be indicated by referencing a respective table assigned by the company.
When thinking about getting a life insurance policy in place to protect your family in a time of need, there are many aspects of obtaining insurance that can be educational. With the common practice of using the internet there are very easy ways today to log on to a website and get connected with an insurance agent that can help you continue your learning process.