Underwriting is the insurer's process of evaluating the risk presented by an applicant and deciding whether and on what terms to issue a policy. The underwriter's goal is to ensure that premiums charged are appropriate for the mortality risk accepted.
The application: the process begins with a written application signed by the applicant and, if different, the life insured. The application collects:
- Personal information (name, date of birth, occupation, address).
- Coverage requested (face amount, product type, riders).
- Medical history (previous illnesses, surgeries, current medications, family medical history).
- Lifestyle information (tobacco use, alcohol use, hazardous activities, aviation, travel to high-risk regions).
- Financial information (existing life insurance, purpose of coverage, annual income -- to assess whether the applied-for amount is proportionate).
Duty of disclosure: the applicant has a legal duty to answer all questions on the application fully and accurately. Material misrepresentation -- a false or misleading answer on a material fact that would have affected the insurer's decision to issue or the terms offered -- is grounds for the insurer to void the policy from inception.
The contestability period: for the first two years a policy is in force, the insurer can contest a claim and void the policy if it discovers misrepresentation on the application. After two years, the policy is incontestable except in cases of fraud.
Medical evidence: depending on the amount applied for and the applicant's age, the insurer may require:
- Attending physician's statement (APS) from the applicant's doctor.
- Paramedical examination (blood work, urinalysis, ECG).
- Full medical examination by a physician.
Small amounts at young ages may require only the non-medical application; large amounts or older applicants require more extensive evidence.
Recall: What is the contestability period? What can the insurer do during that period that it cannot do after it expires?