Understanding how your premiums are calculated is an important step in the insurance process.
It’s not by magic that your insurance policy gets calculated and a premium is determined. There’s a whole process that happens in the background, analysing certain data points in order to underwrite your insurance policy. Sounds confusing. But it actually makes a lot of sense once you understand the process.
What is underwriting?
Underwriting is the process used by insurers to assess risk. In other words, the underwriting process ensures the premium paid is proportionate to the level of risk taken on by the insurer.
Generally speaking, underwriters will look at your overall health, lifestyle, occupation and other additional factors such as age, smoking status and whether you partake in risky extracurricular activities.
Not everyone poses the same level of risk, even if they are the same age with the same occupation. This is because of other factors considered such as family, personal health and lifestyle. A 30-year-old in good health, for example, will most likely be deemed to pose a much lower risk than a 60-year-old with a history of heart disease. Of course, there are no certainties in life and the 30-year-old could be hit by the proverbial bus tomorrow. However, insurance is based on calculable risk which is where the underwriting process comes in.
Breaking down the data points
According to Lifewise, 93% of applicants who go through the underwriting process will have no difficulty getting life insurance. Prior to the process, though, it’s important to know what is going to be asked of you.
- Your name, age, gender and date of birth - age is an important consideration as people who are in their thirties or younger generally pose a lower risk so may qualify for lower premiums.
- Whether you smoke or have smoked in the past
- Family medical history - family history will be assessed as some conditions are genetic and there’s a higher possibility that you may develop them in the future.
- Current health - some insurers may require a medical examination by your practitioner to determine your health. They’ll also look at what surgeries you’ve had in the past and whether you regularly get sick.
- Your occupation - some occupations are classified as higher risk than others. For example, office workers are generally deemed lower risk while those who work in dangerous or risky situations on a regular basis may be considered higher risk.
- Hobbies - there are hobbies like doing puzzles and hobbies such as paragliding. One is deemed a tad safer than the other.
Understanding what insurance companies look at will help you understand why your premiums are what they are. It also means when you are provided with a policy, you’ll know exactly what you’re covered for and what you’re not, providing you with the confidence to make a claim when you need it.