This post discusses how life insurance policies are effected. In this post, you will understand the meaning of life assurance; the essentials of a valid life assurance contract; the standard procedure of a life assurance contract; life assurance underwriting; life assurance underwriting procedure; proposal form; medical factors; medical underwriting; occupational factors; residential factors; financial factors; life insurance underwriting factors; and how to deal with under-average lives.

WHAT IS LIFE INSURANCE?

Life insurance is a contract between two parties (known as the assured and assurer, which is a life insurance office) whereby the assurer undertakes to pay a lump sum known as a death benefit to the beneficiaries after the death of the life assured in exchange for payment of premium by the assured. Having life insurance can ensure that the assured’s family can stay in their home and enhance their living standard. Life insurance proceeds can be used for several purposes. 

DIFFERENCE BETWEEN LIFE INSURANCE AND LIFE ASSURANCE

It is beneficial to discuss the difference between life assurance and life insurance. The terms are used interchangeably in many parts of the world. These terms are similar, but they do not mean the same thing. Both are forms of protection designed to pay after the policyholder dies – but they do not work the same way. 

Here are the three significant differences between life assurance and life insurance:

1. Life insurance covers the assured for a specific period, known as the term, whereas life assurance covers the assured for his entire life or whole life.

2. A life insurance premium is usually lower as the benefit is payable only if the assured dies within the term. In contrast, the life assurance premium is higher due to the indefinite long-term guarantee that the agreed benefits will be paid. 

3. Life insurance does include an investment element, as it only has value in the event of a claim. In contrast, life assurance consists of both investment and protection elements. 

ESSENTIALS OF A VALID LIFE ASSURANCE CONTRACT

Five requirements must be complied with for life assurance to be legally binding. They are:

1. Offer and acceptance,

2. Consideration,

3. Capacity to contract,

4. Insurable interest, and

5. Consensus ad idem.

WHY DO YOU NEED LIFE INSURANCE?

It is beneficial to obtain or purchase an appropriate life insurance policy to provide benefits to people that rely on your earning capacity. A person can buy a life insurance policy to assist and sustain his family and estate in the event of the insured person’s death for planning and investment purposes. 

There are several benefits of life insurance. Here are some of the reasons why you need life insurance: 

1. Illness Protection: As a person prepares for retirement, life insurance policies that cover critical illnesses become essential. 
2. Family Support: If you have a spouse and kids, it is necessary to support them. 
3. Savings Growth: Some life insurance plans can be valuable for saving and investing money in your early working years. 
4. Debt: We often take large loans in a working life, especially when buying a house. An untimely death while the loan is still due can have substantial economic consequences for our families. Life insurance money can be used to pay off the loan in such a scenario.

LIFE ASSURANCE UNDERWRITING PROCEDURE.

As explained earlier, the insurer’s prospectus or advertisement is not an offer but merely an invitation to receive an offer. The proposal form completed by the proposer is, by law, the offer. If prepared to accept the risk, the insurer considers the offer. It will then issue a letter of acceptance stating that the policy will be issued the first premium is paid within a specified time, on the understanding that the state of health of the proposer remains unchanged. 

PROPOSAL FORM

Submission of a completed proposal form is the initial stage of life assurance underwriting. The completed proposal form constitutes a request by the proposer to the life office to issue the desired policy. Life assurance proposal forms usually consist of three major sections:

1. The section that identifies the life to be assured,

2. The section that specifies the details of the contract required, and

3. The section provided the details of the life risks.

The declaration, located at the end of the form, must be signed to affirm that the information provided is accurate and give the insurer permission to seek the doctor for further information. Life assurance always considers some factors during underwriting (i.e., underwriting factors), including medical, occupational, residential, and financial factors.

MEDICAL FACTORS

The insurer may request further information if the proposal form reveals any medical factor. This is referred to as ‘medical underwriting’. Medical underwriting is an insurance term that refers to the use of the medical or health history of the proposer. Further medical information can be secured in two main ways:

1. Medical attendant’s report – from the proposer’s personal doctor, and 

2. Medical examination. The proposal will be subjected to a medical examination. 

The first part of the medical examination report is completed using the information provided on the completed proposal form. The second part of the report is completed based on the examination results. Most life offices have lists of doctors, and the proposer will be asked to contact the doctor and make an appointment. 

MEDICAL UNDERWRITING

Medical underwriting is a life insurance term that refers to using the medical or health history of the proposer (i.e., the life insurance applicant). When an underwriter assesses the proposer’s application, they may be asked to complete a medical examination depending on the information provided. A medical exam is often necessary to give the underwriter accurate depictions of health status. 

OCCUPATIONAL FACTORS

The occupation of the proposer may also be material for underwriting purposes. The underwriter will examine the occupation to see whether it presents a greater-than-average risk of death. Some occupations may result in a higher than (above) average risk of death by accident, while others may predispose a person to an increased risk of disease. 

RESIDENTIAL FACTORS

Residential factors, including climatic risks, used to be very important in life assurance underwriting; but are now much less significant. The advances in transport, medicine, and public health have minimised these risks over the last few decades, and there have been wide-scale reductions in residential extras. Some residential areas may present additional risks. Such risks may arise from political instability or warfare. 

FINANCIAL FACTORS

Underwriters should also consider financial factors in their underwriting. For instance, where the sum assured looks very high for the circumstances of the life assured, the insurer should consider the ability of the assured to pay the premium consistently. The insurer should carefully check the insurable interest situation if a high-value policy is proposed for life. This is necessary to affirm that the proposer has an insurable interest in the life assured of at least the amount of the sum assured. 

LIFE INSURANCE UNDERWRITING FACTORS

Numerous factors will be considered when underwriting a life insurance policy. Only some people present the same degree of risk to life offices. For instance, a young man of 30 years old in general good health would provide a significantly lower risk of early death than a man of 60 or ill health. There are, however, no certainties in life because a younger person could die earlier than an older person. Hence, life assurance is based on calculable risk, which is what underwriters do. 

Here are significant factors that life offices will consider before granting you a life insurance cover:

1. Type and amount of policy,

2. Proposer’s age,

3. Proposer’s gender,

4. Proposer’s health,

5. Proposer’s smoking and tobacco usage, 

6. Proposer’s family health history,

7. Lifestyle and occupation,

8. Policy riders,

9. Proposer’s weight,

10. Proposer’s alcohol-drinking habit, 

11. The sum assured of the existing life insurance policy, 

12. Proposer’s income, and 

13. Amount of foreign travel that the proposer does.

HOW TO DEAL WITH UNDER-AVERAGE RISKS

Each proposer should pay a premium appropriate to the risk run by the life office. Having completed the underwriting process, those lives accepted at ordinary rates are termed ‘average lives’ or ‘standard lives’. Those assessed as having a higher risk of death than average risk are known as ‘under-average lives’ or ‘sub-standard lives’. Hence, under-average lives should pay a higher premium than the standard premium, an ordinary rate, plus an extra premium. 

Extra risks can be classified into three categories:

1) Increasing extra risks – the risk increases with time, e.g., being overweight.

2) Reducing extra risks – the risk is at its greatest at the outset and reduces over time, e.g., tuberculosis.

3) Constant extra risks – the risk is constant while life is exposed to risks, e.g., aviation risks and motor racing.

UNDER-AVERAGE LIVES UNDERWRITING MEASURES

Methods of dealing with under-average lives include:

1. Ordinary rates for limited policy types

2. Exclusions

3. Monetary extra (additional premium)

4. Postponement

5. Declination

See the full video on How Life Insurance Policies are Effected: https://youtu.be/6qDQbEkHRT4