How are Costs, Insurability and Underwriting Defined in Life Insurance?

By | November 12, 2021

Did you know that most people find purchasing life insurance confusing only because they do not understand the key terms used in their policies and process? Understanding the key terms involved with purchasing life insurance can go a long way in helping you pick the policy that fits your needs the best. Let’s take a look at some commonly confused terms in life insurance.

What Are Life Insurance Costs?

The cost of your life insurance is based on the net risk of insuring you from the perspective of your insurance company, also known as the provider. Your costs are determined by a net payment cost index made up of information concerning your age, gender, and lifestyle, including whether or not you smoke.

How are Costs, Insurability and Underwriting Defined in Life Insurance?
How are Costs, Insurability and Underwriting Defined in Life Insurance?

What is Insurability?

Insurability is made up of the factors which prove that your policy is of benefit to the life insurance company. Statistical analysis along with lifestyle evaluations and other measurements is used to gauge the insurability of any one party. Mortality tables are created using your age, gender and use of tobacco products. These tables provide the base cost for your insurance policy.

Together with your health and your family history, the mortality tables help to determine both your premiums and your insurability.

Based on the information found, you are placed into a rate class:

  • Preferred Best — Preferred Best is made up of only the healthiest individuals. If you have no pre-existing medical conditions, do not smoke, and have a clean family history, you will be placed in the Preferred Best rate class. Members of this rate class enjoy the lowest premiums in life insurance.
  • Preferred — Preferred is made up of the individuals who may be under treatment for a medical condition and have some illnesses, such as diabetes, in their family history, but are otherwise healthy, and do not smoke.
  • Standard — Most of us fit into the Standard rate class. You are in mostly good health, but are under treatment for one or more conditions and have several illnesses, such as diabetes and high cholesterol, in your family history.
  • Tobacco — Tobacco is reserved for those policyholders who pose the most risk to the insurance company. Individuals who smoke or chew tobacco pose a severe risk to the insurance company because they are more likely to develop cancer of the lungs, throat and heart, as well as other terminal diseases. Members of this rate class pay premiums as much as double those of non-smoking policyholders.

Other factors that are considered in insurability and that may change your rate class include profession, lifestyle, travel, etc.

How are Costs, Insurability and Underwriting Defined in Life Insurance?
How are Costs, Insurability and Underwriting Defined in Life Insurance?

Also Read: Feeling Homeowners Insurance Claim FormsHow is a Life Insurance Policy Claim Made?

Underwriting — Underwriting is the process of evaluating all of the necessary information to determine insurability. In most cases, your agent will perform the underwriting for your policy, although it varies from company to company.

Remember, if you don’t like the rate class you are in, you can always change your lifestyle to fit that of a lower premium rate class.

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