The Ins and Outs of Underwriting for Life Insurance

Posted by Bill Bruce on Aug 13, 2020 2:15:00 PM


Underwriting for life insurance can be an important part of qualifying for a life insurance policy. Some insurers may not want to offer a life insurance policy until they’ve had the person to be insured (i.e. you or the person whom you’re buying insurance for) undergo some degree of examination.

This is often done to help the insurer know what level of risk there is of the policy being needed immediately after being issued. Underwriting isn’t just needed for whole life insurance, either. It can also be part of preneed insurance used to help cover the cost of funerals.  

What Is Underwriting?

Underwriting is the process of evaluating the risk that the insurance company would take on if it were to approve an applicant for a particular policy. It’s a way for the insurer to establish if the risk of the insured needing to make a claim soon is low enough not to adversely affect their risk pool. “Risk pool” is the term for when a group of insurers (or reinsurers) underwrite a particular kind of risk and share premiums, losses, and other expenses.

It’s a necessity to help keep the minimum amount of funds available to ensure that every insured is able to collect on their policy. If too many insured people collected on their life insurance policy’s death benefit as soon as it was available, the risk pool could run out of money to pay future claims.

What to Expect from Life Insurance Underwriting

Some policies require extensive evaluation of risk factors. This may include a medical exam and lab work, an evaluation of the insured’s lifestyle, and other checks that establish how much risk the applicant to be insured is to the organization. 

Meanwhile, others are available without any such evaluation. The level of underwriting a policy requires affects its cost, coverage amount, and how long it will take before the policy can go into effect. There are three basic underwriting options: guaranteed issue, simplified issue, and fully underwritten. 

You should expect to undergo different level of assessment for the different kinds of underwriting. The length of the process can vary depending on the level of underwriting you’re being put through. A typical timeline for underwriting can be as little as two weeks or as long as a couple of months (sometimes longer if the insurer needs to wait on responses from a medical professional). 

The underwriting process begins with an application, then further steps may change depending on the type of policy being applied for: Guaranteed, simplified, or fully-underwritten.

Guaranteed Issue Policies

Guaranteed issue life insurance policies do not require applicants to answer any health questions or submit to a medical examination. This makes applying simple, easy, and quick. It also makes policies available to those who would otherwise be declined during the underwriting process. On the other hand, guaranteed issue policies are costly and typically available only in low coverage amounts. 

Additionally, in most cases, you’ll need to live for at least two to three years (depending on the insurer) after purchasing a guaranteed issue life insurance policy before the full death benefit becomes available. As a result, these life insurance policies are best for those who have medical conditions that make it difficult to qualify for fully-underwritten policies and still expect to live long enough to make the value of the policy’s death benefit worth the premium.

Simplified Issue Policies

A simplified issue life insurance policy does not require a medical exam or lab work, but it does require applicants to answer some basic health questions and have their prescription history evaluated. This means that the process is still fairly quick, making coverage available within days or weeks rather than months. Because insurers are able to screen out higher-risk applicants by asking a few questions about their health, simplified issue policies are usually available at lower prices than guaranteed issues. 

Typically, these policies make the full death benefit available immediately upon issue. They are ideal for people who don’t wish to go through the hassle of a medical exam and those who want to be fully covered sooner rather than later.

It’s important to be as truthful as possible on the health insurance application in a simplified issue policy. Why? Because, the insurer performing the underwriting process will take steps to verify your application information—such as checking Medical Information Bureau (MIB) reports for past history of misrepresentations in insurance applications. 

Consequences for lying or omitting on an application could vary depending on the severity of the lie, but could include having premiums increased, being denied coverage, or beneficiaries being denied the full value of the death benefit.

On the other hand, honest mistakes or misstatements shouldn’t affect your policy application too much—like if you forgot a medication you took 10+ years ago. Here, getting a copy of your medical records could help you make a more comprehensive and accurate application.

Fully Underwritten Policies

A fully underwritten policy requires a personal interview with a paramedical professional about your health history as well as a physical exam, which may include BMI and blood pressure measurements, lab tests, and other health assessments. 

As a result, this type of insurance takes longer to issue, but it can also be available at a lower cost if the exam indicates that you’re in good health. On the other hand, this type of policy tends to exclude clients whose exams show evidence of health problems.

Life Insurance Policies and Required Underwriting

You may be wondering “Is underwriting required for life insurance policies?” After all, with guaranteed issue policies, it seems like underwriting may not be necessary. However, even under the “guaranteed issue” style of underwriting, there is still some review being made of the applicant to determine the appropriate premiums to charge and amounts to set for the death benefit. 

Underwriting for life insurance is a necessary step to protect the insurer and other insured persons so that policies can be paid out when they’re needed. As a consumer, you may want to be wary of any organization that claims to offer whole or term life insurance with no underwriting at all. At best, it will be a guaranteed issue policy with high premiums and low payouts. At worst, it could be a scam

ELCO’s Underwriting Process for Life Insurance

Whole Life and Final Expense Policies

ELCO Mutual uses a simplified underwriting process for its whole life and final expense insurance policies. The company conducts a short telephone interview to review your answers on the application and validates them with a prescription check. The brief interview lasts just 8–12 minutes for final expense clients and approximately 20 minutes for those applying for the whole life. Decisions on final expense issuance are typically immediate, and our underwriters deliver fast turnaround times on whole life policies.

Preneed Insurance

Preneed insurance, which specifically covers funeral home expenses, is available in both single and multi-payment options. ELCO’s single premium preneed policies are guaranteed issue, and our multi-pay option requires applicants to answer just two basic health questions to qualify.

After more than 70 years in the insurance business, ELCO Mutual remains committed to providing personalized service to our customers. We’re always happy to answer any questions you may have about our underwriting procedures, our products, or your policy. For more information, feel free to browse our online resources and subscribe to our blog.

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Topics: Life Insurance