When you ask someone to describe life insurance, words like “complicated”, “confusing” and “mysterious” often come up. This isn’t all that surprising. Life insurers don’t always do a good job of explaining their products to people. Policy wordings are often pages long and full of terms and conditions written in hard-to-understand language and legal terms. Not exactly the most welcoming start when you’re looking for a policy!
But, Momentum Life is here to help. We’ve been listening to our customers and others who are looking for information to help make buying life insurance a bit clearer.
Many of the questions we’re asked are about what happens behind the scenes when you apply for certain types of life insurance policies – What questions will I be asked? How is my information used? Who makes the decisions? These questions all have to do with one very important part of the insurance world: Underwriting.
What happens when someone decides to get life insurance?
Before we get too far into explaining underwriting, it might help to have a better idea of what happens when someone decides they want to take out a life insurance policy.
When you contact Momentum Life, you’ll speak with a specialised agent who will go through the application with you over the phone.
During the call, you’ll be asked some questions about your health, lifestyle, occupation and activities, as well as family medical history. This information is run through a rules engine which provides the details of the policy we can offer you, such as the premium you’ll pay and if any exclusions will apply.
But, what happens if the information you provide is more complicated? In these cases, your application will be referred to our in-house underwriter for review.
Underwriting begins the moment your details are entered in the system and ends when we receive the final yes or no on your policy. This process is an important part of deciding if you can get covered, and if so, on what terms.
(You may be familiar with some types of life insurances that are known as “guaranteed acceptance” policies. These are generally open to anyone who meets certain requirements – such as being in a specific age group or considered New Zealand residents – and usually don’t require you to answer any questions about your health when you apply. As guaranteed acceptance products work a bit differently, we’ll only be talking about underwritten life insurance in this article, to avoid confusion.)
Explaining underwriting
So, what exactly is underwriting? Simply put – it means “assessing risk”.
Any insurance company needs to determine if they can offer you cover and exactly what your individual policy terms will look like. The two most important factors that determine whether you can be insured – and if you are, what the premiums will be – are your age and health status.
However, there are many other factors that also influence an underwriting assessment:
- Gender
- Smoker Status
- Family history
- Lifestyle and hobbies
- Occupation
- Travel and Residence
But why is this process called “underwriting”? The term is believed to have been coined by the famed insurer Lloyd’s of London, when each risk taker or insurer would literally write their name under the total amount of risk they were willing to accept for a specified premium.
What happens next?
After taking all the above factors into consideration, a life insurance application could go one of three ways:
- The application is approved at standard rates. This happens with applications that are straightforward and means a policy can be issued right away.
- A policy is offered with special terms. In these cases, certain exclusions and/or premium loadings (increased premiums to offset the risk) may apply.
- It’s decided that terms cannot be offered. If this happens, you’ll be advised why this decision was made.
Who actually does the underwriting?
Straightforward applications are generally easy, and those customers typically have a policy in place soon after the call ends, as these applications can be automated by our rules engine. However, more complicated applications will go to an underwriter – an actual human being who will review the information that’s been provided.
The underwriter's role is to look at the information available and make a decision that is fair, both to the individual and to the life insurance company. This may include adding exclusions to a policy, increasing the premiums that you’ll pay (known as a premium loading) or both.
How important is the underwriting process?
You may have already guessed that underwriting is possibly the most important part of taking out a life insurance policy.
However, underwriting isn’t just important to deciding the details of your policy. It also helps insurance companies be fair to all policyholders, by ensuring that premiums match each policyholder’s specific level of risk.
If you take underwriting out of the insurance process, healthy policyholders would effectively support less healthy ones. The average premium for these healthy individuals would have to increase overall to help manage the risk of insuring people who are less healthy.
To explain this better, let’s look at an example:
Imagine a scenario where John and Mark get a quote from an insurance company who will sell them both a life insurance policy – same amount of cover, same price, no exclusions. John is a picture of perfect health, but Mark has heart disease.
Mark thinks the premiums are great. A lot of other companies may not want to cover him because he could pass away suddenly from a heart attack or stroke – and some others may want to charge him a lot more because of this. This policy would be a good deal for him.
But for John, the premiums are way too expensive. He’s fit and healthy and has a low risk of passing away anytime soon. But in order to cover everyone equally, the insurer must charge John more to offset the risk of covering someone like Mark. At the price he’s been offered, John might not be able to keep up with payments. He could end up cancelling his policy in the future, leaving his family unprotected should he ever get sick or have a serious accident.
Underwriting ultimately ensures that the cost of cover fits the risk of someone’s health, risky occupation or activities and lifestyle. That way, the premiums offered are fair to everyone looking to take out a policy. If Mark and John were charged the same price for cover, then John wouldn’t be getting a fair deal.
Taking the mystery out of insurance
As you can see, underwriting is an important part of taking out a life insurance policy. It helps determine whether you can be covered, the benefit amount you’ll be offered and if there will be any exclusions or loadings (or both) on the policy. Understanding underwriting is just one way to better understand how one important aspect of your policy works.
About Author: Momentum Life is a leading provider of Life insurance and Funeral insurance in New Zealand.
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The content provided in this article is for information purposes only. The information is of a general nature and does not constitute financial advice or other professional advice. To the extent that any of the content constitutes financial advice, it is limited to Momentum Life products only and does not consider your specific financial needs or goals. You should consider whether the information is appropriate for you and seek independent professional advice, if required.
All product information is correct at the time this article was published. For current product information, please visit the Momentum Life website.
