Life insurance companies go to great lengths to determine the most appropriate price for life insurance for each and every customer. Their risk assessment methods are extremely complex and the majority of them happen behind the scenes. All life insurance companies have what are called “underwriting classes”, which can be compared to “tiers” that automobile insurance companies use to determine a customer’s rates. Based on different criteria, the insurance company will place the customer into an underwriting class, which corresponds to a certain premium. These underwriting classes are an internal notation regarding the company’s determination of a customer’s financial risk exposure.
Life insurance companies employ people called underwriters, and these are the people whose job it is to examine a customer’s information and select the appropriate underwriting class. Underwriters will make their decisions based on a combination of experience and pre-defined instructions regarding specific criteria, and those instructions are provided by other employees called actuaries.
The actuaries are the true numbers crunchers inside any insurance company. Their job is to analyze data from multiple sources regarding life expectancy (also referred to as morbidity and mortality), and provide instructions for future use by underwriters as to how they should address certain characteristics of new applicants. Actuaries receive their life expectancy data for analysis from sources such as the U.S. government census, the insurance company’s own claims experience, and other recognized official reports and publications.
All of this work is done so that the insurance company may create premium figures that will allow them to collect a monthly payment from customers that is high enough to offset their potential liability and financial exposure in the event that the customer dies.
Insurance companies will therefore be very concerned about certain aspects of an applicant’s situation so they can accurately place the customer into the most appropriate class. Different companies have different names for their underwriting classes, and some companies have more classes than others. However, to keep things simple, there are three major underwriting classes at every life insurance company: Standard, Preferred, and Preferred Elite (or Preferred Plus).
Standard is the category into which the largest majority of Americans fall. Very simply, the Standard underwriting class indicates that a customer is an average healthy individual. Preferred is the category into which individuals fall if they are healthier and pose less risk than the average American. Preferred Elite is usually obtained by extremely healthy and low risk individuals such as athletes and vegetarians, but occasionally it occurs that an apparently everyday ordinary person will qualify here, indicating that they are actually much healthier than they thought.
The issues that most life insurance companies will be concerned with are: tobacco use, motor vehicle history, job description, and medical history. Tobacco use is an obvious concern, and insurance companies charge a higher premium to smokers because of the proven risk to lifespan. Driving history is a concern because a pattern of speeding tickets, moving violations, drunk driving, and at-fault accidents will give another indication regarding a customer’s liability exposure. Job description is important in that it allows the life insurance company to evaluate the likelihood of untimely death at work. Most companies are only concerned when an applicant has a job that’s far above the ground (window-washing skyscrapers), far below the ground (coal miner), or moves very fast (race car driver). People with those types of jobs would be required to pay higher premiums to offset the increased potential and risk exposure.
Medical history is the last major concern for the company, and the one on which they spend the most time and effort to evaluate. They ask about prescription medications, recent surgeries, current build, and dozens of other issues. Companies will also send a nurse to visit the applicant to conduct a sort of mini physical where a urine sample and blood sample are taken. These samples are analyzed by a lab to verify the answers to questions on the paperwork, and evaluate things such as cholesterol, drug use, HIV status, etc.
All this information is examined together by underwriters to determine what underwriting class is most appropriate for the customer. Since the analysis is so specific and the end result is different for everyone, it is entirely possible that two people of the same age and apparent health status will receive different underwriting classes, leading to different policy premiums.