Life insurance is a product that almost all of us need. Regardless of whether we purchase policies for the benefit of our family, business or favorite charity, life insurance can be difficult to acquire. Even those of us in perfect health can run into roadblocks during this process due to the complexity of the mortality assessment. Other factors that affect eligibility for coverage include complications in the underwriting process itself, as well as business standards that must be met.
In this post and the next, I will identify the various trouble spots you may encounter in your quest to purchase life insurance and walk you through ways to avoid them. This information will help those with special considerations or who are considered high risk navigate the process successfully. Here we will explain how the processes of prequalification and underwriting are the key to helping people buy the policy that best meets their needs and goals.
What Is Your Objective When Buying Life Insurance?
In my experience, consumers typically have one of three objectives when they buy life insurance. They want to:
1. Spend as little money as possible: To meet this objective, many people buy cheap term insurance. They also will buy smaller whole life, universal life, indexed universal life policies or variable policies “just to have some permanent coverage without spending a lot of money.”
2. Target a specific living or death benefit: Here, the product is used to accumulate a specified amount of cash for retirement or some other purpose. It could also be used to maintain a specified survivor benefit for estate or business planning. (For related reading, see: Using Life Insurance as a Business Succession Plan.)
3. Get any offer they can: People who pose a high underwriting risk due to a medical or lifestyle issue just want to get an offer. But even if it’s difficult to obtain coverage, they want to make sure the premium or cash potential is still the best the market has to offer.
Prequalification and Underwriting as the Solution
When you think about it, life insurance underwriting is what makes it possible to meet each one of these objectives. To qualify for the lowest premium, you have to get the best rate class. To accumulate a lot of cash inside your policy, or to maintain a certain death benefit over a long period of time, the cost of insuring you has to be relatively low. Otherwise, the premium would not be worth it.
To get a policy when you have diabetes or when you climb mountains, you have to get underwriting that will favorably assess that condition. Once you consider the multitude of factors that are weighed in life insurance underwriting, you can see why it is possible for many people to be considered higher risk. These factors include current health, medical history, family medical history, vocation, hobbies, lifestyle, travel habits and legal/financial/motor vehicle records. (For related reading see: How Is My Insurance Premium Calculated?)
Prequalification Tells You What Underwriting Is Available
Most people want to confirm the buying price before they make a major purchase, and this is true with life insurance as well. This is where prequalification comes in. Through this process, your underwriting challenges are identified before you go through formal underwriting. Carrier assessments of your risk are obtained so tentative pricing can be determined. At that point, you can apply for coverage reasonably confident that your application will be approved at the rate quoted and your overall strategy for the product can be realized.
Prequalification is especially important for applicants who pose a higher risk. In this case, underwriting can be more complicated because atypical or abnormal health or lifestyle factors must be considered. It is critical that preliminary rates are solicited from the carriers who specialize in underwriting these types of risks and that the solicitation is made with thorough, accurate and favorable information. This way your mortality risk can be assessed fairly and the rate quoted can be considered fair and reliable. (For more from this author, see: The Blunt Truth About Marijuana and Life Insurance.)