Underwriting 1201: Different Worlds

An underwriter’s job is to look at an applicant’s medical (and often financial) history and compare it to others in similar circumstances to determine how much money the insurance company needs to collect in order to make a profit. It’s as much art as science, and each type of coverage will involve different criteria.

Here’s how that works in real life:

Sally came to me looking for both life and long term care insurance (for a variety of reasons we did not consider a “hybrid” plan that covered both risks). We decided that a $400,000 term policy with a 20 year rate lock-in would do the trick on the life insurance side, and a plan with a total of $180,000 of long term care benefits would fit the other need.

Now notice: the life insurer is going to be at risk for more than twice as much as the long term care insurance carrier. Note also that they both got exactly the same information from Sally’s doctor.

(The life insurer did have results from its required blood and urine exam, and the long term carrier had the results of a phone interview to test cognitive ability)

So how’d they do?

Well, the life insurance company approved coverage, albeit at a slightly higher premium due to Sally’s physique. But the long term care insurer flat-out declined her.

Interesting, no?

Now, I usually tell people that life and long term care underwriters look at very different criteria because, generally speaking, only one of these plans has the potential for multiple claims. And here’s proof of that distinction.

The good news is that there’s an appeals process available; Sally also agreed with me that she needs to find out exactly what’s in the doctor’s records that caused the problem. This isn’t a a bad idea – after all, Magic Johnson only found out about his AIDS because he had applied, and been declined for, additional life insurance.

The bottom line is that it’s nice to have independent, real-world validation of a basic insurance process. Hard to beat that.