Life Insurance Underwriting: What Factors Determine Risk?
Let’s talk about you.
If you’re even just the tiniest bit familiar with insurance, you probably know that there are certain factors that may impact how much you pay for coverage. This is true for all types of insurance — car, homeowners, business, and more. For life insurance though, it seems extra personal. Insurance companies are looking at you. So, what exactly are they looking at?
In order to explain rate factors, we first must address two important industry vocab words: risk and underwriting.
What is Risk?
Insurance is all about risk. This is the likelihood that an insured event (in this case, death) should occur throughout the duration of the policy term. The higher your risk, the more you will likely pay in life insurance premium — that’s the amount the policyholder agrees to pay in exchange for coverage. Monthly premium is also known as your monthly rate or monthly payment.
Some companies or organizations specialize in offering life insurance coverage to people who are deemed high risk. For example, military service members may have a hard time finding a life insurance policy that would cover death during active duty, so they have their own group insurance plan.
Each insurance company (aka insurer) has their own “formula” to determine how risky you are to insure and what you should pay for coverage. This is called underwriting.
What is Underwriting?
This is the process by which an insurer determines whether it can accept an application for life insurance, and if so, on what basis so that the proper premium is charged.
This is where it gets personal, and maybe even a little invasive. Insurance companies want to get a holistic view of you, and frankly, the old fashioned way hasn’t hurt the $151 billion life insurance industry so far. This is why most life insurance companies insist on a medical exam and interviews, in addition to the stacks of paperwork just to get your application started. (Here at Bestow we use data and technology to make an underwriting decision. We’re not prickin’ anybody.)
How Do Life Insurance Companies Assess Risk?
Risk factors and underwriting vary from company to company. While it would be impossible to name every single risk factor that life insurance companies consider, we’ve grouped the most popular ones into three major buckets: you, your history, and your lifestyle.
Your basic profile — your age, gender, height, weight.
Your age plays a factor because as we get older, our likelihood of dying increases. A 35-year-old female is considered a higher risk than a 25-year-old. Age is pretty straightforward and outside of our control. There’s no stopping aging… yet. However, there’s one exception. Males in their low 20s are actually considered more risky to insure than males in their 30s — risky driving habits are to blame.
When it comes to gender though, life insurance premiums tend to favor women over men. Women live longer than men, so they’re considered less risky.
Insurance companies will also look at your height and weight, but don’t get too hung up on the numbers on the scale. While there are certain health conditions that are associated with being overweight, if you are generally healthy, a few extra pounds shouldn’t prevent you from qualifying for life insurance.
2. Your History
You and your past — medical, prescription, family, criminal, and driving history.
Do you have a pre-existing medical condition? What’s your family history like? What prescriptions are you currently taking?
This is going to sound morbid, but this is information that insurance companies need in order to determine, well, the probability that you may die during your policy term.
This is another reason why young adults are encouraged to lock in a low monthly rate now. A healthy 20-something is considered a lower risk to insure, compared to someone who is later in life with documented medical conditions.
Other things in your history insurers look at:
- If you have a history of driving under the influence, that’s high risk behavior. (Don’t drink and drive. Period.) You’ll likely be ineligible for a policy with many insurance companies.
- If you have recent criminal activity on your record, that might also make it harder for you to get approved for a life insurance policy.
3. Your Lifestyle
You and what you do — occupation, finances, habits, hobbies, and travel.
What you do for a living matters. Some occupations are riskier than others. Loggers, fishermen, roofers, and electrical power-line installers are working some of the most dangerous jobs in the U.S. You can probably guess why someone in one of these professions has more risk than an accountant or writer (no, carpal tunnel isn’t deadly).
Insurers also look at the data behind your credit score (like timeliness of payments or if you’ve filed for bankruptcy), but not your credit score itself. Instead, they use this data to assign their own score, called a “mortality score”, to determine your level of risk. To be clear, the request for this data is only a soft credit inquiry, so this doesn’t impact your credit.
In regards to habits, we’re talking specifically about tobacco and alcohol. We’re not here to remind you of the dangers of smoking or drinking excessively. We all know that there are a lot of risks involved with each of those habits.
Most hobbies are fun and safe. Others, not so much. Are you an avid deep diver or recreational pilot? Do you race cars or rock climb outdoors? Those are high risk hobbies and might make it harder to get an affordable life insurance policy.
Similarly, foreign travel itself isn’t bad, but if you travel to a country that is in the middle of a war, you’ll have to find an insurer that writes life insurance policies specifically for high-risk travel.
What If I’m Considered High Risk?
During underwriting, the insurer will assign you, the applicant, a “risk class.” For the purposes of this article, let’s give each risk class a simple name: elite, good, below average. Insurers may have even more risk classes, but let’s just stick with three for this example.
- Elite (least risky) are the healthiest, probably younger, and get the best rates.
- Good (average risk) are mostly healthy, might be a little older, and get good rates.
- Below average (more risky) have health issues, and/or are older, and pay more but still get coverage.
If you are a higher risk, you can likely still get a policy, but you’ll pay more than someone who fits in the elite or good risk class.
If you’re extremely high risk, you’ll have to work with an insurer that writes specialized policies for high risk individuals. A licensed insurance agent will know which insurance companies do just that. You can also sign up for basic group life insurance through work if your employer offers it.
Our life insurance survey found that while Americans want life insurance, one of the major reasons why they don’t have it is affordability. A whopping 74% said more affordable options would make them more likely to buy coverage. And what makes life insurance more affordable? Buying sooner rather than later.
Now that you have a better understanding of how life insurance underwriting works, feel empowered and take action today to protect your family’s financial future.
Bestow policies are provided by North American Company for Life and Health Insurance®, an insurance carrier rated A+ (Superior) by A.M. Best. Limitations or restrictions may apply.