The idea of Life Insurance underwriting is what determines the cost of your policy. If might even determine if you will even be able to purchase life insurance at all. But what is it?
In the insurance industry, the term underwriting refers to the process of evaluating risk. In order to understand what underwriting is, you have to review the basic premise on which insurance operates. The underlying principle of insurance is the transfer of risk. The risk is taken away from the insured and transferred to the insurer. What makes this possible is that the Insurance Company is going to assume the risks for a large number of individuals.
Since the large number of individuals will be paying premiums, there will be funds available to pay claims and still allow the Insurance Company to pay its expenses and make a reasonable profit. In order to make sure that this is true, there must be a very good understanding of just what the risks are and projections must be made of how many claims are likely to be paid. When this information is understood, a premium rate can be determined that will guarantee that sufficient funds are available.
So, underwriting is evaluation of risk. Life Insurance underwriting is the evaluation of such factors as health and life expectancy. This is done by the preparation of life lists. These life lists are called mortality tables or actuarial tables. They basically give the expected life span of humans at a given age and given health condition.
Life Insurance underwriting is usually done on an individual basis. This is actually the whole point of the process. Each person presents a totally different situation. Individual health, age, life style, and even gender will all be considered. The idea will be to assign a certain risk factor to the individual and use this risk factor to determine the amount of money that needs to be charged for the Insurance Policy in order to make the assumption of risk acceptable.
Insurance Companies vary in their underwriting policies. This is why it is necessary to shop around a bit when considering insurance. What you are looking for is not only the Company that has the best overall rates, but also the Company that is going to “underwrite” you for a better rate.
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