How does life insurance underwriting work?

Underwriting is a process where you personal circumstances are assessed by the insurer to determine the risk you may represent.

Underwriting is one of the most important steps in the approval process of a life insurance application. It is at this stage that an insurance company assesses an individual’s background, pre-existing conditions, age, occupation, hobbies and more.

That’s why, when you apply for a life insurance policy, you’re asked to answer a series of questions before you’re approved for cover. While uncommon, you might also need to undergo a medical assessment or provide medical records depending on your answers. It’s important you answer all the questions truthfully, otherwise a future claim may be contested or denied.

Underwriters have a large pool of data they use to compare your application with other policy holders and past claims, which helps them estimate the probability of a future claim to determine if they can insure you and on what terms.

The factors an underwriter considers

An underwriter will assess your personal circumstances including your health, medical history, and lifestyle. For example, if you’re a 45-year-old smoker whose hobbies include rock climbing and skydiving, you’re likely to pay more than a 30-year-old maths teacher. Generally, the more an insurer understands your individual circumstances, the less assumptions they need to make, and the better price they may be able to offer for your policy.

The most important considerations vary on a case-by-case basis. These may include questions about your health or details about your body-mass index (BMI), cholesterol level, exercise regime, health history and pre-existing conditions.

Perhaps the most obvious health question is whether you’re a smoker. Decades of research has proved smokers have a higher likelihood of contracting a range of illnesses, from heart disease and stroke to cancer. Due to this, smokers may need to pay a higher premium, or a loading, to cover the increased risk. Some insurers will also want to know the last time you smoked – scientific evidence shows that after a year the body starts repairing, with your chance of a heart attack reducing by 50 percent. After another five years, the risk of cancer also halves.

Another factor underwriters consider is your age. The older you are, the more likely you are to make a claim, and this helps underwriters determine how much they’re willing to insure you for, as well as the impact to your premiums. For example, someone aged 30 will likely be approved for a higher level of cover and pay less than, say, a 55-year-old.

Underwriters will also ask for your occupation. This is because some jobs, like construction, mining and trucking, are more hazardous than others. Office jobs can also carry a risk of stress

and mental disorders which could, depending on the nature of the work, affect the underwriting of income protection insurance with sickness benefits.

What happens if you’re considered high risk?

If you’re assessed by the underwriters as being high risk, you may either be declined or you may have to pay higher premiums or loadings to access cover. You may also need to agree to specific exclusions. These exclusions might apply to certain pastimes like skydiving or other extreme sports that you participate in and mean you won’t be covered if something happens to you while doing this activity.

There are also general exclusions that are not part of the underwriting process but affect all policies. These may include travel to high-risk countries and wartime operations – read the Product Disclosure Statement of your policy to clarify what these are.

Reviewing your policy when life changes

If your circumstances have changed, you may be able to request a review of your policy without additional underwriting. For example, if you’ve started in a new occupation or quit smoking, you might be eligible for reassessment to reduce how much you pay.

Some insurers also have annual policy review dates providing an opportunity to demonstrate lifestyle changes or adjust the level of cover. For some life events, such as marriage or having children, you may also be eligible to increase your cover amount up to a limit without needing underwriting reassessment. Read the Product Disclosure Statement to confirm what is available to you.