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The Undertaker – No! The Underwriter Is In The House

Underwriting is a distinctly mysterious process.  It sounds unpleasant; lots of agents are vague about its origins and validity in everyday life.  They might explain it as a necessary evil, a hurdle in the application process,  a minefield to navigate.  And it can be all those things!

Here’s the deal.  Insurance is a two-way arrangement.  You may well want to buy some coverage to protect against something bad happening; whoever agrees to sell you that protection has to be willing to take on that risk.  Neither side wants the bad thing to happen.  You don’t buy health insurance, for example, hoping that you get diagnosed with a rare cancer or liver disorder so you can use every penny of that $3 million benefit.  You buy it hoping to never need the catastrophic coverage but trusting it to be there should the worst occur.

Your insurer does not want your total premium payments over the year of, say, $5,100 to turn into a $450,000 event – an event they absolutely will pay for – a few months after you buy the plan.  Now suppose this happens 150 times in five months.  They couldn’t stay in business – and remember, insurance is a business.  And that’s fine.  But clearly the math does not work in their favor, here.

So they devised a system to manage this situation.  In order to buy coverage, you must meet an insurer’s requirements.  This process, risk-classification or underwriting, helps the insurance company assess your  life expectancy (morality) or your chance of sickness and disease (morbidity).  This helps them decide whether to accept your application, decline it or to issue a substandard policy.  Such a policy may cost more, offer fewer benefits or exclude a specific condition.

Risk selection is based on actuarial projections and anticipated claims experience.  Insurance companies have been crunching these numbers for decades and are really, really good at it.  And this is the reason why their applications will ask you about the following:

  • Your current health and physical condition
  • Your health history
  • Your job (hazardous occupation?)
  • Personal habits, including tobacco, alcohol or drug use
  • Your age (a 52-year old pays more than a 24-year old)
  • Your gender (except in unisex states)
  • Other factors include military status, driving record, sports, hobbies, aviation activities, other insurance
Next, we will see what they do with this information.  
Note about health care reform: it is here; one way or the other, things will change in our system.  But there are many, many debates and proposals and counter-proposals ahead.  Where we will ultimately land is anyone’s guess.  So the best thing to do is stay informed, work on your finance, health and fitness and get yourself a good agent or broker.
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