How Underwriters Determine Term Life Insurance Rates

By Gary Bangstad on April 28th, 2010

If you are shopping for term life insurance or whole life insurance, having a basic understanding of the underwriting process will help you avoid surprises when you get life insurance quotes. According to the Insurance Information Institute (III), underwriting is "examining, accepting, or rejecting insurance risks and classifying the ones that are accepted, in order to charge appropriate premiums for them."

By knowing the risk factors insurance companies use to determine your life insurance rates, and whether or not your health or lifestyle are considered "high risk," you can be more prepared for the underwriting process.

Correct Pricing Essential

Underwriting is about managing risk. In order for life insurance companies to provide insurance coverage and pay claims, they must have large cash reserves, which are required by law, to meet all of their financial obligations. To maintain cash reserves, insurers have to run their businesses efficiently by making wise and secure investments. In other words, they have to make ends meet or make a profit.

If a life insurance company is too lax in its underwriting and charges too little, it could go bankrupt. On the other hand, if a company is too strict in its underwriting, it may charge too much and lose business to competitors.

Factors That Determine Your Premium

When you are younger, your risk of dying is lower, and thus your premiums will be lower. For example, a preferred, 20-year level, term life insurance policy offers a good illustration of the advantage of youth. A $200,000 policy for a 22-year-old male, nonsmoker might cost about $12 a month. The same policy for a 62-year-old male might cost around $142 or more per month.

And because women tend to live longer than men, their life insurance rates are typically lower in most states.

Your family's health history is also a predictor of your own longevity. Your life insurance rates will generally be higher if any of your immediate family (meaning parents or siblings) died of such chronic illnesses as cancer, diabetes, heart or kidney disease, or stroke prior to age 60.

Your own health status has a significant influence on your rates. Common medical issues that cause rates to go higher include:

  • Obesity: The life span of an obese individual is shortened by about seven years
  • Cancer, AIDS, asthma, rheumatoid arthritis
  • Kidney or liver disease
  • Lung or heart disease
  • High blood pressure or high cholesterol
  • Mental illness or depression
  • Alcohol or drug abuse
  • Nicotine use: Until you've been nicotine-free, in any form, for an extended period (many insurers require at least 1 year), you may pay higher rates.

But "risk" doesn't stop at health. Because other circumstances affect your life span, these factors also play a role in life insurance rates:

  • Poor driving record: Multiple tickets, DUI, etc.
  • Dangerous occupations: Fireman, policeman, miner, pilot, etc.
  • Risky hobbies: Sky diving, car racing, mountain climbing, scuba diving, flying non-commercial aircraft
  • Foreign travel: Especially to risky areas such as Afghanistan, Iraq, or Sudan
  • Your personal finances: The insurance company may use your present income to determine an appropriate level of coverage. (A large insurance policy can be out of proportion with a limited income.) Also, if you have declared bankruptcy, you will be seen as a "risk."
  • You've lapsed or cancelled previous life insurance policies: Most of the insurance company's expenses come in during the first year of issuing a policy -- through sales commissions and the underwriting process. Therefore, insurers are interested in knowing whether you are likely to keep your policy and pay premiums for at least a few years.

Verifying your health status

When you apply for life insurance, you are often required to have a paramedical examination, which is paid for by the insurance company. The exam usually includes:

  • Drawing blood
  • Collecting a urine sample
  • Determining your height and weight
  • Checking your pulse and blood pressure
  • Possibly doing a complete EKG (electrocardiogram)

Finally, your insurance company may request an attending physician's statement (APS) from your primary physician to complete the underwriting process.

Double-checking Your Application Answers

If you've applied for health, life and disability insurance policies in the past seven years, your answers to application questions are likely stored by the MIB Group. MIB's primary purpose is to detect and deter fraud by people who either "forget" a medical condition or try to hide it during the underwriting process.

You can request your own MIB Report.


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