Purchasing a life insurance policy is a sure way of providing financial stability to your family in the event of your unexpected death. However, if every life insurance policyholder eventually dies, and their insurer pays out, how do insurance companies continue to stay in business and gain million-dollar profits every year.

Life insurance companies generate revenue by charging you premiums and investing a portion for the premiums they collect.

Most insurance companies generate revenue using two pillars: underwriting and investment income.

Investment Income

Insurers make a significant amount of money through investment income. Whenever a policyholder pays their monthly premium, the insurer will take that money and reinvest it in the market to acquire interest-generating assets.

Insurance companies also have a contingency plan if all goes south. In the event of a significant financial loss, the insurer will raise the price of insurance premiums and pass those financial losses to policyholders in the form of higher policy premiums.

Underwriting

Underwriting revenues come from the money collected on insurance policy premiums, subtracted by the money paid out on claims for operating the business.

What is Underwriting?

Shortly after applying for life insurance, you will go through a process called underwriting with the insurer you have chosen. An underwriter is an individual who works for a life insurance company whose job is to evaluate your application in depth. Each person who applies goes under a significantly extensive assessment. You will be asked for personal health information, age, income, gender, lifestyle habits, and sometimes even credit history in this assessment!

The life insurance underwriting process takes on average five to six weeks to complete; however, if an insurance broker is involved, they can make the process much easier.

Insurers will collect this data and analyze the amount of risk they will take. If an insurer concludes that the risk is far too high, they will either deny the policy to the applicant or grant the policy to the applicant and a higher premium to offset some of the risks.

The Underwriting Process

Every life insurance company has its own set of guidelines and processes for calculating your premiums. However, while they may vary from company to company, the steps are generally the same.

Step 1: MIB Check

Before an underwriter even reviews your application, the MIB gets involved. The MIB is a trade group that assists insurers in sharing medical information and preventing fraud. This check allows underwriters to see details about your medical history from previous life insurance applications (up to 3-5 years in the past)

This isn’t to say that it will hurt your final classification if you’ve applied for life insurance in the past. The MIB’s role is simply to help the underwriter by painting an accurate picture of your medical history, which helps keep premiums low for both the insurer and applicants.

Step 2: Application Quality Check

The insurer will then go through your life insurance application and conduct a phone interview to ensure they have all the correct and necessary information to move forward. The phone interview takes anywhere between 15 and 30 minutes to complete. During the interview, you will be asked about your hobbies, lifestyle, finances, and medical history.

After the interview, you will officially undergo the life insurance underwriting process. Each step will add time to your application, but it is critical to be thorough, so you don’t pay more than you need to for your life insurance policy.

Reminder: Missing any information can significantly slow down the underwriting process, so it is essential to go through your application slowly and thoroughly.

Step 3: Medical Exam

The first step of the underwriting process is a medical exam. The exam is pretty much like any other checkup you’ve had before with your family physician. However, this one is free for you (yay!) A medical technician will conduct the exam at a lab (or sometimes at your residence) to collect information about the following:

  • Basic Measurements
  • Blood Analysis
  • Drug Analysis

The results of this exam are then sent to the underwriter. It is good to know that you can reuse these results to apply for other life insurance applications (even if it is with another provider)

In some cases, insurance companies have policies and underwriting procedures that allow applicants to skip the medical exam. While this may sound like a good thing, no exam policies usually come with lower benefit amounts and higher monthly premiums.

Step 4: Attending Physician Statement

Upon reviewing your medical results, the underwriter may order an Attending Physician Statement. Ann APS simply summarizes your medical information from your doctor’s perspective. This could help provide insight into the underlying causes of medical conditions.

Step 5: Prescription Check

The underwriter will then check all the medications that have been prescribed to you over the last three to five years. The prescription check confirms all the previous information that has been collected in your applications.

The underwriter may choose not to move forward with this step, depending on your other medical exam results. However, life insurance companies with higher coverage amounts typically require a prescription check.

Step 6: Motor Vehicle Report

A motor vehicle report outlines your driving history dating back up to seven years. This report includes driving violations, accident reports, driving record points, and DUI convictions.

If this report comes back with an extensive record of wrongdoings, your life insurance premiums will be higher than an applicant with a clean driving record.

Good To Know: If you have a DUI on your record, you could be denied a policy entirely.

Step 7: Actuarial Tables

Underwriters use an actuarial table – a sophisticated analysis of your life expectancy to evaluate how risky you are to the insurer.

Step 8: Credit System

Sometimes, underwriters will use a credit system check to help you qualify for better premiums.

Step 9: Your Final Rating

After five to six weeks, when the underwriting process is complete, you will see which life insurance policies and premiums you qualify for.

Other Ways Insurers Generate Revenue

Whole life insurance policyholders may eventually choose to close their account down because they want the money.

Cash Value Cancellations

When this happens, insurance companies are more than willing to oblige because when a policyholder takes cash value money and closes their account, all risks no longer depend on the insurer. Additionally, the insurance company can keep all the premiums that have already been paid to the insurer and pay the policyholder back with interest that they have earned on their investments and keep the principal.

Coverage Lapses

It is not uncommon for policyholders to keep up with policy renewals which end up being beneficial to the insurer.

A policy lapse means that the actual policy expires despite no claims being paid out. In that scenario, insurance companies profit from all previous premium payments by the insurer, with no claim being paid.

Another way insurers cash allows a policyholder to take on all the risk of keeping an active policy and walking away scot-free is that the policyholder outlives the coverage timetable or eventually doesn’t keep up with paying their premiums.

Reinsurance

Several companies invest in reinsurance to reduce their overall risk. Reinsurance is insurance that insurance companies purchase to protect themselves from incurring significant losses. Reinsurance is a critical component of insurance companies’ strategy to keep themselves in business.

Reinsurance makes the insurance industry more attractive to invest in.

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