What is underwriting and why does an insurer do this?

Underwriting is a process that helps insurers find out how much risk is potentially involved in offering you a term plan. 


Underwriters will go through your term plan application and based on the results decide if the insurers should 

• Give you a policy (either at a regular or hiked premium)
   

• Decline your application
   

• Postpone your application to a later date

Let’s understand with an example. Assume you’re a chain smoker. Or you have type 2 diabetes. Or you are in a hazardous profession. These factors make you a very high-risk term insurance customer. 

This is because you are more likely to die than a person not affected by these conditions and the insurer will have to pay the policy money to your family. 

Insurance underwriting helps the insurer decide how to proceed with your term plan application so that they can manage this risk better. 

There are two different types of underwriters in an insurance company: 
 

• Financial underwriter

• Medical underwriter

Financial underwriting is a process by which an underwriter evaluates your requested life cover and approves or rejects it based on factors like

• Your current income

• Your business/debt-related needs

Financial underwriters help insurers evaluate an individual's risk and make sure that you are not covered beyond your actual requirement.

If you have poor lifestyle habits, or an underlying health issue, it will have a direct impact on your term plan application. But how does the insurer figure out how to assess your health profile? By a process called medical underwriting. 

Medical underwriters help the insurer get a clear picture of your health by evaluating factors like:

• Your lifestyle & habits (smoking, drinking etc.)
   

• Medical history (yours and your family’s)
   

• Your occupation & dangerous hobbies (if any)
   

• Living in or frequent travels to a risky location

Based on the findings from underwriting, an insurer can take one of the following decisions:
 

• Approve your application 
   

• Approve your application with an increased premium
   

• Reject or even postpone your term insurance application to a later date