How Insurers Underwrite Life Insurance

Insurers charge a premium and when they receive that premium they use it to build up a fund. That fund then earns interest however the insurer incurs some costs not only on writing the business, selling the policies but also on administering the fund. In addition the fund must be sufficient to pay out claims (deaths).

The life insurance companies use mortality tables which help them estimate when a group of people may be expected to die. Insurers can not tell when any one person will die, but they often they can say with some level of certainty that of 100 people aged ‘x’ next birthday one person will be expected to die within the next twelve months.

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So if all people were the same then insurers could manage the fund and charge premiums to make certain that the fund always had enough money in it to pay the deaths that would be expected to occur that year.

However not everyone is the same. Some are fitter than other. Some have illnesses. Some have had accidents. Some are over weight. Some smoke whilst others drink.

To get a better idea how fit people are insurers ask medical and life style questions. From this information they can load (increase) premiums for those who they believe present the greater risk.

Now insurers could have every one take a medical. However medical reports are expensive and would slow the process up. So insurers set a financial limit where customers who want a certain sum insurance and above have to have a medical and those below do not. These limits may be varied by answers given to the medical and life style questions.

Insurers also have to make certain that their premiums reflect the type of cover they give. Including terminal illness cover may not increase the risk much more but over a period of years and over 1,000 insured’s it must increase the cost of the risk by a certain amount.