Buying Life Insurance Part Two: Underwriting

Life InsuranceLife Insurance underwriting can be a somewhat cryptic topic.  Today, we'll talk about what the is needed for underwriting, and how decisions get made.  Most of this discussion will focus on what a client will face when it comes to underwriting, both financial and medical (medical being the much bigger and more labor intensive part to the process).  So after you've signed the application and sent the agent away, this is what comes next.

Hopefully this will give you a better idea of what the terminology means when an agent tells you something like “The next step is a paramed exam with blood and urine.”

Well, Actually Lets Start with what Already Happened

Financial underwriting for life insurance tends to be a pretty smooth and easy process.  Though it can get a little more complex with larger cases.  We'll start with the simple and progress from there.

Insurance companies frequently ask little more than your stated income in the insurance applications.  And that's it, you're done with financial underwriting.  There's a little the insurance agent has to do in order to justify the amount of death benefit on the life insurance policy, and by a little, I mean very little.  All he or she really needs to ensure, is that the total death benefit that will be in-force upon issue of the policy, does not go beyond the companies stated limits for the income of the insured.

Keep in mind that life insurance has a function to replace lost income due to death, and insurance is intended to indemnify the loss.  So insurance companies want to replace, at most, the total Net Present Value of ones potential earnings to retirement.

If you happen to be asking the insurance company for several million dollars in death benefit, they are going to take a little more time to perform due diligence and ensure that you truly qualify for the amount.  In this case, they'll typically ask you to perform a financial questionnaire.  It's usually a pretty simple one or two page document that asks you to list assets and (in some cases) provide proof of income or assets (typically you'd need to be north of $5 million in death benefit for a verification request to be made).

Medical Underwriting

Medical underwriting will typically begin at policy application with the agent (if you're agent is good, it might even begin before that when he or she asks you about possible health problems when you first meet).

Within the application there is general a battery of health related questions like the last time you say a doctor, your height and weight, and basic yes/no questions to certain medical conditions.  This is generally (but not always) what is known as the Paramed Part One or Non-Med.

If the agent chooses, he or she can also go over the extended health questions that are part of the Paramed Part Two.  These are the questions that would be asked as part of what is generally known as the “Paramed Exam.”

The Paramed

The Parmedical (aka Paramed) exam is one of the most ubiquitous steps in a life insurance application.  It is another battery of health related questions (typically yes/no) and includes the following physical measurements:

  • Height
  • Weight
  • Chest Circumference (both compressed and non-compressed)
  • Waist Circumference
  • Pulse Rate
  • Blood Pressure

The paramed is performed by an examiner (typically a nurse) who can visit you at your home or office (you can also schedule the appointment at their location) and typically takes about a half hour to complete.

Blood and Urine

Applications for life insurance frequently require a blood and urine analysis, and samples are collected during the paramed exam.  These samples are used to check the following:

  • Cholesterol
  • Blood Sugar
  • Nicotine
  • Traces of various controlled substances (the exact ones vary from company to company)
  • Urine Protein (kidney function)

Electrocardiogram

Depending on the policy face amount and your age, the insurance company may require an EKG reading be done.  If required, this will take place during your paramed exam.  The examiner will have the EKG machine with him/her and will simply need to apply the leads to your chest and allow the machine to take a reading.  The output will be sent to underwriting for review.

Medical Exam

For larger face amounts (typically north of $10 million) the insurance company may require that you undergo a medical exam instead of a paramed exam.  Medical exams are also sometimes required for older insureds at lower face amounts.

The medical exam is performed by a Medical Doctor.  The exam itself is almost identical to the paramed and generally doesn't take any longer.  Medical exams are typically performed at medical facilities.

Stress Test/Treadmill

Insurance companies have largely gotten away from stress test as a part of medical underwriting, though they do still exist for certain face amounts (there's a lot of variation among insurance companies concerning what the trigger would be but generally $10 million plus for most people under 60).

If this is required it's pretty similar to your average stress test.  It would accompany a medical exam and be performed at the same time.

Cognitive/Memory Test

This is a relatively new function of underwriting. And we've talked about cognitive tests before.  They are generally performed on proposed insureds who are over 70.  It's a memory test that requires the applicant to remember a set of words and recite them later on during the paramed or medical exam.

Medical Records

In our last post, we pointed out that medical records can take some time to arrive at the insurance company's underwriting offices.   There are several reasons for this and it's one area where both client and agent may not have a lot of control.

When and Why Medical Records are Ordered?

Attending Physician Statements (aka APS's) are the notes that your doctor takes when he or she meets with you.  These records are ordered for various reasons.  A lot of insurance companies will order them as an extra measure of due diligence when the face amount of the policy exceeds $1 million (sometimes $2 million or more for people under 40).

The biggest trigger for APS orders on smaller face amounts come from information disclosed during the health questions.  If, for example, you have had surgery for some purpose (maybe to correct a deviated septum–very common) then underwriting will generally order an APS to ensure everything went as planned and there are no further complications.

An APS is also very standard for “impaired risk” situations some form of substantial medical malady that has required medical care (i.e. heart disease, diabetes, depression, etc.).

APS Prudence

Though most medical professionals understand their notes are not private, doctors are humans and not impervious to exercising bad judgment.  It's not a bad idea to know what your APS says about you.  Sometimes, offhand remarks from a doctor can wreak havoc on an applicants insurance application.

If you're in great health, probably nothing to worry about.  If you've had to consult a specialist for any reason, might not be a bad idea to order your own APS.  This is easily done by contacting the hospital and paying them something in the neighborhood of 25 cents per page for the records.  Also, many doctors will gladly send you a copy of the notes they take on your visit for free if you ask them to do so when you meet with them.

The Medical Information Bureau

Located in Braintree, Massachusetts, the Medical Information Bureau (MIB) is a repository for medical information collected by insurance companies.  When an application is submitted insurance companies often check the MIB for any records contain for the proposed insured.  They will often send information to the MIB after an underwriting decision has been made, which will be kept at the MIB for (usually) at least seven years.

You can request the MIB send you whatever information they have stored about you once per year.  Simple visit their web site and fill out the very simple form to make the request.  The MIB actually has a pretty quick turn around time on getting this to you.

The MIB also has pay for services you can use to look up possible life insurance ownership of a deceased person.  The service has an admitted failure rate of roughly 50%, but if you believe there might be a policy in force, and you don't know where else to look it might be worth the nominal fee.

Motor Vehicle Report

Insurance companies will also generally pull up a Motor Vehicle Report (MVR) to check for possible moving violations or other vehicle related citations issued.  This is particular important information for younger proposed insureds.  The MVR is searched by your driver's license.

Inspection  Report

Inspection reports are typically required only on larger face amounts.  It's a phone interview where someone from an examining company asks you all of the health questions (again) in the longer version of the paramed exam.

How Long Does it Take?

The entire underwriting process is generally 4-6 weeks, possibly longer if with and APS requirement (especially if more than one APS is required).  For smaller face amounts with limited requirements (say no paramed, just the original health questions asked by the agent) the case typically goes to something known as the Jet Unit where it can be issued in about a weeks time.

Worth the Wait and Effort?

Some agents who are lazy, impatient, or in bad need of money attempt to capitalize on a clients fear of needles, prodding questions, or whatever else and suggest simplified or guaranteed issue life insurance.  There is certainly a place for this type of insurance, but if you are a healthy individual who can qualify for at least standard rates on a fully underwritten policy, it makes little sense to go the simplified or guaranteed issue route (unless of course this is a specialized group insurance situation).

Though it can be a little bit of a process, life insurance underwriting is certainly worth the time and effort. The difference in price is pretty not insignificant.

So with a little patience and, we'd suggest preparation for what to expect, you can sail through the life insurance underwriting process without much trouble.


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