When you apply for a long-term insurance policy, a financial adviser will ask some personal questions about your lifestyle, family history, health, and even ask you to take some medical tests. This process is called underwriting, but is it really necessary?
Justmoney finds out why underwriting is important when purchasing long-term cover.
Tip: Protect your family’s income. Get a life cover quote here.
What is underwriting?
Underwriting refers to the process of assessing the risks faced by the applicant for life insurance, and how those risks affect the terms of the policy that can be offered, says Petrie Marx, product actuary at Sanlam Individual Life.
When you apply for life insurance, you’re essentially asking the insurance company to take on the potential risk of paying a claim in future. The purpose of this evaluation is for the underwriter to decide how much cover can be offered, as well as the final premium that should be paid for the particular protection.
Why is it important?
Marx says underwriting is important for both you and the insurance company.
“It gives you the peace of mind and confidence that you’ll be able to rely on the cover when it’s time to make a claim. It also ensures that you, along with all the other life assurance clients pay a fair premium for the duration of your cover,” says Marx.
To the insurance company, it ensures that the cover offered is financially sound and sustainable, so that all claim pay-outs can ultimately be honoured when required, he says.
READ MORE: What will happen if you lie on your life insurance application?
How long does it take to do?
According to Marx, there are essentially three steps in the underwriting process.
“Firstly, you’ll be asked to answer certain questions as part of the application process. These questions relate mostly to health and past medical history, but also includes information about occupation, travel, potentially hazardous activities, and your financial position,” says Marx.
The second step will be for the insurance company’s underwriters, or mechanical underwriting system, to gather any further information, or set up medical tests that are needed. This can happen almost instantaneously – up to 48 hours after receiving the application.
The third step is for you to complete these further tests or requirements, which will depend on your availability to undergo those tests – for example at a pathology laboratory or your regular doctor, or for a service provider like a travelling nurse to visit you.
The turnaround time for underwriters to have a final look at all the results and make a final underwriting decision should then, again, be very fast. On the whole, the underwriting process can typically be completed within a week, although more complex underwriting situations may take up to two weeks to complete, says Marx.
When is it unnecessary?
An underwriting process of some sort, is generally necessary for all types of risk products. However, such a process can sometimes be much reduced, where the maximum available cover amount is limited, and the average premium rate, per R1000 cover, is perhaps more expensive, explains Marx.
The insurance company also looks at previous underwriting information that can still be considered valid and may reduce any further requirements to be asked for accordingly, he adds.
“People who retire from their employer’s group risk scheme sometimes also have the option to take out individual life insurance with an insurance company, without any new medical underwriting,’’ says Marx.
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