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Life Insurance Underwriting
By Stefano Sandano
Many people today have a small amount of life as a benefit of employment; however, it is seldom sufficient to provide for total family protection, college education, or business coverage in the event of premature death.

To cover these financial needs people buy individually underwritten life from the private market in different amounts and at different times throughout their life. People seeking this protection are free to choose when to buy, what to buy, and how much to pay for coverage. They can buy when they are young and healthy, or wait until middle age hoping their health will stay good, or they can buy at a higher premium if they develop a chronic illness.

Based on their financial portfolio and coverage needs, they can choose products ranging from an inexpensive term product to high cash value (whole life) product. The private life system provides an important financial safety net, but it is entirely voluntary and unsubsidized. An individual life policy is, in effect, a commercial transaction in which the insurer agrees to pay a specified death benefit in exchange for payment of a premium proportional to the mortality risk assumed by the insurer.

The one characteristic common to all individual life products is transfer of the financial loss caused by unexpected death to the life company. The real product is payment of the death benefit regardless of when that death occurs during the lifetime of the product. The death benefit for each individual far exceeds annual and cumulative premiums plus earnings for several years, particularly for young applicants.

To offer this financial protection, the company must be able to identify and distinguish the risks each applicant poses, assess these risks, charge the appropriate premium to cover the risks, and invest wisely so that sufficient moneys exist to pay all present and future claims. Different groups of insured’s with different life expectations must be distinct based on real differences in mortality expectation.

Life expectancy varies by age, gender, medical and family histories, avocation, and lifestyle. Applicants for life have different medical histories and risk factors for future disease that affect life expectancy. Each group of underwriters is charged a premium sufficient to cover costs associated wt its expected rate of death. The primary task of an underwriter is to assess life expectancy based on medical, occupational a vocational factors significant to life expectancy.

It is vital that the insurer have a full understanding, and particularly the same knowledge, as the applicant in order to assess accurately that risk equitably.
Before offering coverage to an applicant, life insurers attempt to identify factors that may shorten the person’s usual life expectancy at a given age. If identifiable risks exist, the underwriter uses actuarial and medical information to calculate life expectancy and determine an appropriate premium.

There are many different types of life products and their particular features play different roles in determining the price of each one. Because life expectancy is defined as the age at which half the insured’s will have died, it’s a moving target that increases with the age of the individual at the time of application.

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