Because not all life insurance companies are the same.
One of the misconceptions that I deal from time to time deals with life insurance companies and underwriting. All too often people assume that life insurance companies are all alike. I had a recent client mention recently, “I thought this process was sort of like buying a car— every dealership, for the most part, sells the same thing. The only difference was the salesmen and wiggle room on the price.” If you’re of the same opinion or if you’ve never really given it much thought, this couldn’t be further from the truth! The reality is that underwriting is vastly different from company to company and choosing the right life insurance company for your personal needs can in many cases, save you thousands of dollars over the life of the policy.
What is Underwriting?
Let’s define our terms:
gerund or present participle: underwriting
- sign and accept liability under (an insurance policy), thus guaranteeing payment in case loss or damage occurs.
Here’s a good definition in laymen’s terms from Investopedia: “Underwriting helps insurance companies manage the risk that too many policyholders will file claims at once by spreading out the risk among outside investors.” Underwriting is simply an insurance company’s assessment and management of risk. All insurance, whether it be property and casualty insurance, health insurance, or life insurance works by spreading out risk. For life insurance, the risk that is managed is the monetary loss associated with the death of a person. For instance, your spouse or children would experience not only a loss of a loved one but also a financial loss in the event that you weren’t there to continue to provide for them. That risk of monetary loss is underwritten by an insurance company and shared by large pools of policyholders. Life insurance only works as risk is shared by large groups of people. Think about it this way: if you were an insurance company with 10 policyholders, how devastating would it be to your company if you had to pay out a claim on 1 or more policies? You’d be bankrupt as the other 9 policyholders wouldn’t be paying enough to make up the difference. But, you wouldn’t be affected as much if you paid a claim while having a million policyholders would you?
If you are currently the owner of a life insurance policy, your policy was underwritten, your risk was assessed and all that worked together to determine the amount of premium that you will pay. The premium is an insurance company’s way of describing the amount of money that you are exchanging in return for coverage. The less risky you are as a policyholder, the less money that you are required to pay. Conversely, the more risky you are as a person, or the more likely it is that the insurance company is going to pay your claim, the more money you will pay for coverage. As a side note, this is one of the reasons why it makes good financial sense to lock your life insurance in when you’re young and healthy. This is true especially with your term life insurance as you can “lock in” large amounts of coverage at a time in your life when you’re likely to need more coverage. For more reading on the when, why, and where, read
What Determines How My Policy Is Underwritten?
For simplicity sake, there are three areas in your life that are going to determine how risky you are and ultimately the premium you will pay:
- Your past health.
- Your current health.
- Your future health.
I bet you were expecting more than that weren’t you? But it’s true as you can lump just about every bit of underwriting into one of those three categories. Now, in each category, there numerous variables such as cholesterol, blood sugar, height/weight, history of disease etc. that people commonly think of in underwriting but all of those will fit into one of those three for the most part.
You can currently be the healthiest person in the room but be underwritten negatively for how you lived years ago. If I were to ask you, “how healthy are you?” How would you reply? You probably said something like, “I’m not the healthiest person on the planet but for the most part, I’m pretty healthy.” Really? Funny story: I’ve never asked that question that someone didn’t tell me how healthy they were. Ever! I’ve had numerous people that were either morbidly obese or taking several different medications for various issues tell me how healthy they were. It’s the same if you ask someone, “how intelligent are you?” No one will ever say, “you know, I’m just not that bright.” We all view ourselves in hopeful terms! I digress. Why does your previous health affect your current premium? It all has to do with increased risk. Think of it this way. If you smoked for years but have stopped smoking for the past year, you’re still more risky than the person who’s never smoked.
Conversely, if you used to be super healthy but have currently, “let yourself go,” you’re going to pay more premium. Items that influence your current health are things like cholesterol, sleep habits, weight etc. When each of us evaluate our own health, this is typically where I mind goes.
Your future health is simply your familial health. Again, you can be the healthiest person you know right now, but be at an increased risk because of your family’s health. To me this is the toughest part of underwriting because I’ve had to tell marathon runners, triathletes, and gym owners that they’re just not as “statistically” healthy as other people who don’t spend as much time on their personal health. When insurance companies evaluate future health, they’re primarily concerned with a family history of heart disease, cancer and in some cases, diabetes. So you can feel better knowing that they’re not concerned beyond those three.
Underwriting is the most important aspect in determining how much you’re going to pay for the next 30-40 years of your life. -Sam Price
So What Does This Have To Do With Term Life Insurance?
Underwriting affects all types of life insurance but I wrote this specifically with term insurance in mind as statistically, this is the life insurance that you’re mostly likely to purchase. Your term life insurance will be the foundation that we’re going to build off of. For those of you of the Dave Ramsey persuasion, this may well be the only type of life insurance that you’ll ever own.
When you go through the application process for your first term life insurance policy or to replace your current coverage, underwriting is the most important aspect in determining how much you’re going to pay for the next 30-40 years of your life.
The Right Agent Will Vastly Affect Your Underwriting
If you don’t remember anything I’ve said, you have to remember this next statement: when you’ve done your research and you’re ready to buy your life insurance, working with a competent, life insurance broker will many times determine the outcome in underwriting. Let me say that differently. You have a much better chance of getting a better premium by working with an insurance broker. Why? Remember at the beginning when I said that insurance companies are all different in terms of their underwriting? Well it’s true. Every life insurance company has different standards for your past, present and future health. They use different underwriting manuals, they have different histories of underwriting, and will have a better or worse tolerance for various types of risk. Some of these differences are drastic. It is not uncommon for me to cut upwards of 50% off of a client’s premium just by selecting the proper insurance company! When you read that statement, I know your first thought is that I’m being salacious for marketing purposes but I do this every day because most people just don’t know or know of someone they can trust.
CASE STUDY #1
Bryan was paying over $5,000 annually for his coverage. Robert is a local business owner who needs a good deal of coverage for his business and large family. By selecting the proper insurance company and ergo, underwriting, I was able to save Robert over 30% on his premiums per year. Robert’s dad has passed away at an early age due to a heart issue. Because of his family history, all of Robert’s life insurance was at standard rates. But being a good life insurance broker, I knew of a few life insurance companies that were willing to offer preferred rates if at least one of his parents lived to beyond the age of 65. Side note: there is an agent somewhere that made a very nice commission when better options were available.
CASE STUDY #2
Chris was using his home and auto company for his life insurance. (always a big no no. See here and here) Chris was covered for $500,000 for 20 years of term life coverage. Chris was a business owner whose company had grown larger over the past few years and he wanted more coverage to protect the value of the company. By selecting a carrier that was a little more lenient for his weight, I was able to give him the option to either double his coverage to $1 million and was still able to save him money every month.
CASE STUDY #3
I met Robert, age 48, at a coffee house recently. He had literally just come from his home and auto agent’s office (think of the “Mayhem” commercials) with a brand new life insurance policy in hand. He was paying $235 monthly for $1 Million in coverage. By selecting a company that was a little more lenient for cholesterol, I was able to get Robert’s premium down to $130 per month for the same coverage!
Don’t get me wrong; the best life insurance is the one that pays out in the event that you pass away. If you’ve been overpaying for your insurance policy your whole life, chances are it isn’t your fault as you just didn’t know whom to trust or what options where available. In the event that something happened to you, your family would still have been protected, assuming you had a proper amount of coverage. But here’s the thing, I’m passionate about insurance because there’s a better way. You’re going to be paying for your life insurance for the better part of your life. So you might as well have the best company, the most coverage, for the best premium. I can do this for you. Shop online, do your due diligence, and educate yourself on your options. But when you’re ready to buy, plan on spending a few minutes with me. It may just make all the difference.
If you have any questions on what term life insurance would look like for your financial needs, please don’t hesitate to call me at: (205) 578-2097 or email: firstname.lastname@example.org. As always, our advice is free and there is never an obligation to buy.