4 Types of Life Insurance Underwriting
Life insurance is a powerful financial tool. It can protect your loved ones from financial disaster. But how do you get it and how do you get the best price? There are 4 types of life insurance underwriting. We walk you through what they are, and why that matters.
What is life insurance underwriting? And why should you care?
When you think of making a purchase most of the time you look for the best deal and you order it. Maybe if you are adventurous you will go to store and pick the item out.
When you purchase life insurance things are a little different. You have to be accepted by the company to have the privilege to pay them. Can you believe that?
I say that a little tongue in cheek while it is true it is not as bad I as made it out to be. Let us dig into what that means and why it is actually a good thing most of the time.
What is Underwriting?
Life insurance companies pay massive claims out when an insured person dies. They need to make sure that they are going to be able to afford those claims.
Underwriting is the process the life insurance company uses to approve or deny a policy application. It is their way of determining the risk of an individual policyholder becoming a claim.
Why does it matter?
We all want to get the best deal on the things that we decide to purchase. Life insurance is no different. I know I don’t want to pay more than I have to.
When a company has a good underwriting process they are able to walk the fine line of offering great rates and making a profit. This might be something that we like to think about but that is what they are in business for in the first place. Without it they would just pack it up and then your coverage would go with them.
Traditional Underwriting or Fully Underwritten
This is the first and the most comprehensive type of underwriting.
When you think of life insurance what comes to mind? No, not that. This isn’t the movies.
You probably think of all the hoops they want you to jump through to get a policy. This is the type of underwriting that has been around from the beginning of life insurance.
Paramedical Exam
I always recommend scheduling your exam for what ever time is the normal start of your day. For accurate results you are expected to fast for 8-12 hours before the labs.
If you are a morning person knock it out first thing and move on with your day. That way you don’t have to skip your meals and suffer all day.
This is the term used when the nurse comes out to the house and completes the in person underwriting.
You can expect it to take between 20 – 60 minutes depending on the actual questions and tests performed. Typically you will be provide:
- Identification
- Answer the medical history questions specific to the company applied to
- Physical measurements such as height, weight, blood pressure and heart rate
- Urine sample conducted by the examiner to ensure no tampering
- Blood draw
- EKG if your case requires it. This is typically reserved for larger policies or for clients 60 and older
- You will sign the company paperwork and the examination paperwork which will then become part of the application and a copy will be included in the final policy
The carrier will typically get the results in about 72 hours and make a copy of the results available to you either by mail or electronic login.
Blood Tests & Urinalysis
A main component of traditional underwriting is the dreaded blood test and peeing in a cup. They send a nurse out to your house and stick you with a needle and take your precious blood, then you have to make the walk of shame with your cup of urine.
Why would they want that? Well in that tube of blood they are going to learn a lot about you and what type of risk you are. So what are they testing?
The application is going to ask you directly about your tobacco and or drug use. This is one of the ways that they can verify your answers. If you answer no smoking but test positive you have some explaining to do.
Maybe you are taking prescriptions?
The labs will indicate if you are having any issues with your:
- Heart
- Arteries
- Kidney
- Bladder
- Liver
- Pancreas
- HIV
Chemistries
| Determination | Your Result | Expected Range | Test Guide |
|---|---|---|---|
| GLUCOSE | 60-124 mg/dL | Measures the blood sugar level. Elevations are indicative of diabetes. | |
| FRUCTOSAMINE | 0.00-2.09 mmol/L | Measures blood sugar concentrations over the preceding one to three weeks. Elevations are indicative of diabetes. | |
| HEMOGLOBIN A1C | 3.0-5.9 % | The A1c test may be used to screen for and diagnose diabetes in addition to monitoring the glucose control of diabetics over time. It provides an accurate longterm index (100-120 days) of the average blood glucose level. This test is not affected by short term variations such as food intake, exercise or stress. | |
| BLOOD UREA NITROGEN (BUN) | 5-25 mg/dL | BUN is a by-product of protein metabolism and is cleared by the kidneys. Elevations can result from any type of kidney disorder, strenuous exercise, or diuretic medications. | |
| CREATININE | 0.50-1.30 mg/dL | A by-product of muscle metabolism, also cleared by the kidneys. Elevations suggest kidney or muscular disorders. Protein diets may cause mild elevations. | |
| ALKALINE PHOSPHATASE | 20-125 U/L | An enzyme found primarily in the bone and liver that may indicate bone, liver or kidney disorders. Generally higher in children than in adults because of its role in the bone making processes. Levels may be elevated at times of pregnancy. | |
| TOTAL BILIRUBIN | 0.10-1.50 mg/dL | A by-product of the breakdown of old red blood cells and is made into a water soluble form in the liver. Elevations may be due to anemia, chronic liver disease, and carcinoma. | |
| SGOT (AST) | 0-41 U/L | Enzyme which has three main sources, skeletal muscle, heart muscle, and liver tissue. Elevations can be due to disease or trauma to the muscles, to heart damage, and to various liver diseases. SGOT may also be elevated in the presence of certain medications. | |
| SGPT (ALT) | 0-45 U/L | An enzyme present in many tissues including the liver. Elevations occur in acute viral hepatitis and other liver disorders. SGPT may also be elevated in the presence of certain medications. | |
| GAMMA GLUTAMYLTRANSFERASE | 0-64 U/L | A liver enzyme that is present in various tissues. Elevations may indicate hepatitis, heavy alcohol consumption or the use of certain medications. | |
| TOTAL PROTEIN | 6.1-8.2 g/dL | Very low values may be associated with peripheral edema or malnutrition. High values may suggest dehydration, chronic inflammation. | |
| ALBUMIN | 4.0-5.2 g/dL | Serum albumin is the main protein in plasma. Higher values represent dehydration, while lower values are generally a result of renal or hepatic problems. | |
| GLOBULIN | 2.1-3.9 g/dL | High levels of globulin are found in severe liver disease, some infectious diseases and multiple myelomas. |
Cardiac Risk
| Determination | Your Result | Expected Range | Test Guide |
|---|---|---|---|
| CHOLESTEROL | 140-230 mg/dL | Cholesterol is a Blood lipid (fat) which has a direct correlation with the chances of developing coronary heart disease. Elevated cholesterol levels can be hereditary or from excess dietary intake of cholesterol rich foods. | |
| HIGH DENSITY LIPOPROTEIN(HDL) | 35.0-55.0 mg/dL | High density lipoproteins facilitate the transport of lipids (fats) to bodily tissues. HDL removes excess cholesterol from arteries, inhibiting the formation of atherosclerotic lesions. HDL can be increased by regular exercise, weight loss, smoking cessation, and reduction of fat intake. | |
| LOW DENSITY LIPOPROTEIN (LDL) | 0-129 mg/dL | Low density lipoprotein is known as the ‘bad’ cholesterol. High levels of LDL carry cholesterol through the blood, ‘painting’ it on arteries in combination of calcium and plaques | |
| TRIGLYCERIDES | 0-149 mg/dL | A blood lipid (fat) derived primarily from carbohydrate intake. High levels may be associated with various disorders, including diabetes, alcohol abuse, and pancreatitis. Readings are extremely sensitive to diet. | |
| CHOLESTEROL/HDL RATIO | 0.00-4.99 | Cholesterol reading divided by the HDL reading. The lower the ratio, the lower the risk of coronary heart disease | |
| LDL/HDL RATIO | 0.00-4.99 | Low Density Lipoprotein divided by High Density Lipoprotein. The higher this ratio, the greater the risk for coronary atherosclerosis |
Urinalysis
| Determination | Your Result | Expected Range | Test Guide |
|---|---|---|---|
| LEUKOCYTE ESTERASE | NEGATIVE | Renal Diseases and infections of the urinary tract may elevate the number of leukocytes found in urine. Leukocytes secrete enzymes such as leukocyte esterase which may be used as a marker for the presence of leukocytes in biological samples. | |
| URINE TEMPERATURE | 90.5-99.6 F | ||
| URN PH | 4.5-7.8 | Urine pH is utilized as a screen for renal or urinary tract disease. | |
| URN SPECIFIC GRAVITY | 1.001-1.035 | Low specific gravity is characteristic of diabetes or tubular necrosis, while high values may occur with dehydration, congestive heart failure, kidney failure, liver failure or shock. | |
| URN CREATININE | 10.0-300.0 mg% | Creatinine levels primarily measure renal function. Decreased levels may indicate impaired renal perfusion, urinary tract obstruction, or kidney related disease. | |
| URN GLUCOSE | 0.00 g/dL | Sugar glucose in the urine. Presence is generally thought to be the result of diabetes. | |
| URN TOTAL PROTEIN | 0.0-30.0 mg/dL | Excessive protein in the urine. An elevated result may indicate common infections of the kidney, prostate or vagina or extreme muscular insertion. Elevations may also indicate metabolic or systemic disease states such as diabetes mellitus, kidney disease, renal failure, multiple myeloma, etc. (eff 10/12) | |
| URN PROTEIN/CREATININE | 0-200 mg/gCRE | Protein/Creatinine Ratio may help determine whether protein is elevated due to kidney disease or urine concentration. | |
| URN RED BLOOD COUNT | 0-3 HPF | Red blood cells in the urine. Presence can indicate diseases, structural abnormalities, or injury to the kidneys, ureters, bladder, prostate, or urethra. | |
| URN RED BLOOD COUNT | 0-10 HPF | Numerous white cells in the urine usually imply urinary tract inflammation such as cystitis or pyelonephritis. Renal infection is suggested by the presence of white cells and white cell casts | |
| URN HYALINE CASTS | 0-4 LPF | Excessive numbers of casts are associated with renal disease. | |
| URN GRANULAR CASTS | 0-3 LPF | Excessive numbers of casts are associated with renal disease. | |
| URN BLOOD | NEGATIVE | The presence of hemoglobin in the urine may indicate kidney and/or urinary tract disease, but is also present in normal conditions such as menstruation or physical stress. | |
| NICOTINE METABOLITES, URN | 0.000-0.299 ug/mL | Nicotine in the urine indicates tobacco use of some type. Cutoff values have been established to differentiate smokers/tobacco users from nontobacco users, including those non-smokers exposed through passive inhalation. |
Physical Measurements
- Height
- Weight
- Blood Pressure 1
- Blood Pressure 2
- Pulse at rest
Attending Physician Statement
A lot of the time the company will also want to get a detailed medical history beyond just the answers you give to the questionnaire.
To ensure the integrity of the answers they receive they will have a 3rd party service request copies of your last 5 years or more medical records from your primary care physician and any specialists you have seen.
They will be looking for validation of your answers as well as anything that you may have missed or neglected to provide during the application process.
This is by far the biggest delay in the approval process. Often times Dr. offices are very busy and have limited staff working with the records. It is pretty common for this stage to take weeks, often longer.
When necessary you may need to reach out to your Dr. office and request they expedite this so the company can make a decision.
Financial Underwriting
The life insurance companies also do check of your overall financial situation.
This can be as simple as the questions on the application. They use a ratio of multiples of income for any given age group to justify the amount applied for.
For business cases or large policy requests they can even ask for personal financial statements and or tax documentation.
This keeps everything proportional to your needs. Think about it a high powered CEO making $1M per year won’t need a small burial plan and visa versa an elderly person living on Social Security wouldn’t need or be able to afford a $5M policy.
For estate planning there can even be trust documents that are needed to set up the ownership and the beneficiaries correctly. Failure to do so could be very costly by causing tax consequences.
Accelerated Life Insurance Underwriting
More and more life insurance providers are stepping into the technology age and are adopting accelerated underwriting.
If the goal of underwriting is to get an accurate risk assessment how can you do this with technology? How can the company get good info with out all the intrusion and hassle for you?
Lexis Nexis profile
There is a consumer profile company called Lexis Nexus, they build a risk profile.
The report includes items such as real estate transaction and ownership data, lien, judgment, and bankruptcy records, professional license information, and historical addresses.
LexisNexis Consumer Page
Based on this profile life insurance companies have insurance scores based on their experience with similar clients sharing the characteristics of your profile. They are using data to estimate if you are a good risk based on if the others were a good risk.
I you have a tax lien or bankruptcy they are applying that data to the decision.
MVR (Motor Vehicle Record)
Another automated check they can order is your driving record. They factor this into your overall risk profile. After all speeding does increase the risk of injury in an accident.
Have a dui? That is going to cause some concern to any company looking at having to pay a claim.
This is not unique to the accelerated underwriting though. The company will be verifying your driving history with any track you chose.
Rx History
Yep another database that companies can buy info from is a prescription check. They can access the last 5 years or more of your prescriptions.
It makes sense that if you say you are in good health and have no history of taking medication that you are telling the truth.
But what about someone who claims they are “perfectly healthy” and cancer medication shows up in that search? You guessed it they will be denied. Not only because they were treated for such a condition but because they lied about it.
It is never a good idea to lie about your history for a life insurance application. That can actually give them grounds to deny a claim. It is not worth it.
Phone Interview
Most companies will have an underwriting phone interview for the accelerated program. Either by an employee of the company or by one of the vendors that usually conducts the exams in home.
Based on this phone interview the company will determine if you qualify for the accelerated track or if you will be shifted over to the more intrusive path that requires the blood and urine collection by an examiner.
The companies are all over the map with I have some companies that are approving only 10% after the phone interview, and some as high as 50% get through.
It is crucial to disclose everything to your agent so they can identify if you have any of the knock out conditions that will require an exam every time.
For example if an applicant has any of these conditions they will typically not qualify for the express underwriting.
Existing Medical Conditions
| Alcohol abuse/ or treatment | Demntia/Alzheimer’s | Hypertension average BP 140/85 |
| AFib | Diabetes | Kidney Disease |
| Bipolar | Drug abuse | Melanoma |
| Cancer | Emphysema | MS Multiple Sclerosis |
| Cardiomyopath | Epilepsy/Seizure | MD Muscular Dystrophy |
| Elevated Cholesterol (untreated) | Gastric Bypass /Lap Band | Parkinson’s Disease |
| COPD | Heart Disease/Surgery | PAD/PVD Peripheral artery/vascular disease |
| Cirrhosis | Hepatitis B or C | Prescription Narcotic |
| Crohn’s | Huntington’s Disease |
There are also non-medical conditions that will trigger the need for labs or vitals by an exam. Those will vary by company.
Simplified Issue or No Exam Life Insurance
Believe it or not, there are policies out there that don’t require much work on your end. These are commonly referred to as No Exam Life Insurance or Simplified Issue plans.
As the name implies there is no exam need and in most cases, they will not ever ask for an exam or labs. This type of plan is reasonably easy to get for people who are in decent health.
Accept or reject Underwriting
Similar to the other plans there will be electronic data collected and analyzed to make the decision about your approval or not.
These plans rely heavily on the Rx report, Lexis Nexis profile, MVR and the phone interview.
Typically these plans will have knock out questions in the application. So if you answer yes to certain questions you are not eligible and will be declined.
Likewise they have a knock out list of medications from the prescription database check. If you are taking any of those medications it indicates to the company that you don’t meet the risk profile they are targeting for that product. You will be denied the plan.
This is known as accept or reject. This basically means that either you are approved or your are not. A traditional policy has health classes and you can be approved for any range of rates based on your underwriting. This ranges from Preferred + to many substandard rates that charge additional premium vs the base rate.
Think of it like the difference between a good driver vs someone with a suspended license. Who do you think will have cheaper car insurance. Same thing with life insurance.
Healthy low risk customers get the best prices. With traditional plans you can fall in that range based on how much risk there is.
So what is the catch? Why wouldn’t everyone just jump on this program from the start?
There are a few downsides to such plans:
- Cost
- Limited face amounts
- Not as many company options
- Reduced conversion options
Cost
As a trade off for getting less data from you the company is less willing to take the risk. They pass this on to the client in the form of higher prices. Life insurance is priced in units of $1000 these plans use a higher per thousand cost.
On top of that many of the simplified issue options don’t have a preferred rate class. This can really add to the total premium difference.
Take a 30 year old female for example. Good health, good height and weight, and nothing that would stop her from being offered preferred rates. She just doesn’t like the idea of giving blood.
With a traditional policy her preferred rate for $500k 30-yr term would be $32 month. That same coverage with a no exam company is $52 because they best rate they offer is “Standard”, another option was actually $69 per month! That is double the cost.
Limited face amounts
Many of the simplified issue plans will max out at $500k of coverage.
For many people that will be enough but if you need a larger policy this is a drawback to the no exam options.
Not as many company options
There are hundreds of insurance companies in the USA. We work with dozens of companies and only work with the top A rated carriers.
When you choose a no exam underwriting path you are limiting the carrier options to only a handful. Not every company offers every underwriting path.
Reduced conversion options
Many of the term policy options available today have conversion options built into the policy. This can be a powerful tool later in life when choosing what to do with a life insurance policy.
The no exam life insurance plans tend to have less favorable conversion rules written into the plan.
This might not seem important now but if you have a health condition down the road you may no longer qualify for a new policy. Conversion can save the day.
Guaranteed Issue or No Underwriting Life Insurance
You are telling me that after all this there is an option to get a policy with no questions asked?
Sure is, it is called guaranteed issue or acceptance life insurance.
Sound too good to be true? Well for many people this is absolutely the wrong way to go. There are some cases that it is good for but they are few and far between.
A GI plan has no exam, no health questions, you cannot be turned down for health reasons so what makes it a bad fit?
Graded Benefits
These plans do not provide immediate coverage. The first 2-3 years of the plan they will only pay a portion of the plan amount. Most of the time the 1st year it will pay the premium + interest back rather than the full policy.
Year 2 typically is a % of the plan. 20-30% is pretty common.
Year 3 it will finally pay the full amount to the beneficiary.
Low policy amounts
These plans are usually limited to very low amounts of coverage.
Most of the plans are limited to $25k of life insurance. Not only is it a low amount for many people it is very often permanent coverage so it is very expensive.
Limited age groups
These plans are frequently targeted towards seniors. Many of the plans that offer the guaranteed issue option are not available for people under 50 in most states.
I bet you have heard one to the commercials recently on the T.V. or radio. Something about are you 50-85? For only $10/ month you could get guaranteed acceptance life insurance with no medical questions ever.
Those plans ads are typically referring to a $1000 policy! Yikes remember that per thousand cost we mentioned earlier? That is $10 per month per thousand, so a $10k plan (more appropriate for burial) would be $100 per month. Not to mention you have to live 2+ years to get it.
Guaranteed issue term
There are a few “group” term plans that are guaranteed issue for folks under that 50 age.
They work similarly to the GI plan above with the graded death benefit. They don’t pay out the first couple of policy years.
Who would they be good for. If you have a significant health condition that would prevent you from being approved with a more favorable option.
We use this as a last resort for people that cannot be approved with other types of plans.
Conclusion
The bottom line is that life insurance companies are in business to make money not give it away. If you are looking for life insurance it is our job to tip the scale in your favor.
No one wants to pay more than they have to but the trade offs can often be worth it for many clients.
We have found that most people are happy to pay a few extra dollars a month to avoid having the labs and being stuck with needles. We can help you make the decision that is right for you.
If you are trying to decide which type of plan is right for you please reach out and we can walk you through your options.