How life insurance underwriting works
Key takeaways
04 · ideas- Underwriting evaluates age, health, family history, and lifestyle
- Preferred Plus applicants can pay significantly less than Standard applicants
- No-exam policies exist but typically cost more per dollar of coverage
- A 10-year age difference roughly doubles the premium for term insurance
Basic level
The essentials · 2 min
Underwriting is the process by which an insurer evaluates an applicant's risk and assigns a corresponding premium.
Main factors evaluated:
Age: The most predictable factor. Mortality risk increases with age, so premiums increase with age. A 35-year-old typically pays roughly half the premium of a 45-year-old for the same coverage.
Health status: Medical exam results, health records, and medical history. Conditions like diabetes, heart disease, and certain cancers affect risk classification.
Family medical history: Hereditary conditions in immediate family members are considered.
Lifestyle and occupation: Smoking, tobacco use, and hazardous occupations can increase premiums significantly.
Risk classes: Insurers assign applicants to risk classes determining the premium. Common classes: Preferred Plus (best rates), Preferred, Standard Plus, Standard, and substandard ratings.
Intermediate level
How it applies · 1 min
Premium differences by risk class
For a 40-year-old male, $500,000 20-year term (approximate market ranges):
| Risk class | Monthly premium |
|---|---|
| Preferred Plus | $30-$40 |
| Preferred | $38-$50 |
| Standard Plus | $48-$65 |
| Standard | $58-$80 |
| Substandard | $80-$120+ |
Medical exam process
For fully underwritten policies above a certain face amount, a paramedical exam is typically required: blood and urine samples, height, weight, blood pressure, and sometimes an electrocardiogram. The applicant does not pay for the exam.
No-exam policies: Simplified issue and guaranteed issue policies are available with lower coverage limits and higher premiums per dollar of coverage.
Advanced level
The math, step by step · 1 min
Actuarial tables
Life insurance premiums are based on mortality tables from the Society of Actuaries. The net single premium for a term policy:
Where v = 1/(1+i) is the discount factor and {}_t q_x is the probability of dying in year t given survival to age x. Actual premiums include loadings for expenses, profit margin, lapse rate assumptions, and risk margin.