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When you apply for term insurance, the insurer doesn’t simply issue the policy without assessing certain factors. They follow a process known as underwriting, which evaluates the risk associated with insuring you. Underwriting plays a critical role in determining whether your policy will be approved, how much premium you’ll pay, and the extent of coverage you’ll receive. Let us understand the concept of underwriting in term insurance, how it works, what factors are considered, and how it impacts your policy.
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Underwriting is the process by which a term insurance company assesses your health, lifestyle, and other risk factors to determine whether they can provide you with term insurance coverage. This assessment helps insurers decide:
Whether to approve or reject your policy application.
The premium rate you will pay for your policy.
The amount of coverage (sum assured) you qualify for.
The goal of underwriting is to protect the life insurance company from taking on excessive risk by ensuring that the premium you pay reflects your risk profile.
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The underwriting process in term insurance typically follows these steps:
You begin by filling out an application form for term or life insurance. The form will require details such as personal information (age, gender, occupation), medical history and family health history, lifestyle choices (such as smoking or drinking habits), and financial details (if applicable).
Many insurance companies require a medical examination as part of the underwriting process. The examination checks your overall health and identifies potential health risks. Tests may include blood pressure measurements, cholesterol levels, and other routine checks. For younger and healthier applicants, some insurers may offer term insurance without medical exam for a relatively low coverage amount.
The underwriter will review the information provided on your application, along with the results of your medical examination. This review helps the insurer assess the level of risk you pose as an applicant. Key factors include existing medical conditions (such as diabetes, hypertension, etc.), family medical history (genetic predisposition to diseases like cancer or heart conditions), and high-risk lifestyle habits (smoking, excessive drinking, etc.).
If you’re applying for a high sum assured, insurers may also assess your financial background to ensure that the coverage aligns with your income. This is done to prevent over-insurance, where the coverage amount is significantly higher than the applicant’s earning capacity. To check the ideal cover amount for your profile, you can use the human life value calculator or the HLV calculator, free of cost online.
After the risk classification, the insurer will either approve or reject your application. If approved, they will offer you a policy with a specific coverage amount and premium.
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Several factors come into play during the underwriting process. Understanding these can help you better prepare when buying term insurance.
Age is a major factor in determining your regular and annualised premium. Younger individuals typically pose lower risks, so they tend to pay lower premiums compared to older applicants.
Your current health status is thoroughly evaluated through medical exams and past health records. If you have any chronic conditions (like diabetes or heart disease), it may lead to higher premiums or even rejection of coverage.
Underwriters assess lifestyle choices such as:
Smoking: Smokers are at a higher risk of developing serious illnesses, so they are charged higher premiums.
Alcohol Consumption: Excessive drinking can also lead to higher risks and increased premiums.
Exercise and Diet: A healthy lifestyle may help you qualify for lower premiums.
High-risk jobs (such as construction, mining, or working in hazardous environments) can result in higher premiums since the likelihood of accidents or illness is greater.
If your family has a history of serious illnesses like cancer or heart disease, you may be placed in a higher-risk category, even if you’re currently healthy.
In some cases, gender can play a role in underwriting. For example, women generally live longer than men, which might result in lower premiums for females when buying term insurance for women in India.
There are different types of underwriting methods that insurers use to evaluate applicants. Here are the most common ones:
This involves a detailed review of your medical history and lifestyle, often requiring a medical examination. Medical underwriting is typically used for high-coverage policies.
This is used for low-coverage policies or for individuals who meet specific age and health criteria. It requires minimal medical information, and a medical exam is usually not needed.
This method involves a short questionnaire about your health but does not require a medical exam. It is faster but often comes with higher premiums due to the lack of detailed risk assessment.
No medical exams or health questions are required, and the policy is issued to anyone who applies. This is often used for small-coverage policies but comes with much higher premiums due to the risk for the insurer.
The underwriting process has a direct impact on the following aspects of your term insurance policy:
Your premium is determined based on the risk assessment. The higher the perceived risk (due to factors like health, age, or lifestyle), the higher the premium you’ll pay.
The insurer may limit the sum assured based on your financial profile and risk level. If they believe the coverage is too high in relation to your income or risk profile, they may offer a lower coverage amount.
In cases where the risk is deemed too high, the insurer may reject your application. High-risk factors like severe health conditions or risky lifestyle habits can lead to rejection.
Underwriting is an essential part of the term insurance process, ensuring that insurers can assess and manage the risk of providing coverage. By evaluating factors such as age, health, lifestyle, and occupation, the insurer determines your eligibility, premium rates, and coverage amount. While underwriting may seem complex, it ultimately helps balance the interests of both the insurer and the policyholder. By understanding how underwriting works, you can better prepare yourself for the process and make informed decisions when purchasing term insurance.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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