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.

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.

Also each insurer will have different customers selecting that insurer. Maybe one insurer will attract young people. Another might attract office workers whilst another might attract those in the medical profession. Some insurers may attract customers who live north of Watford whilst others those who live in the London area.

If you add enough diversification then you can see how it is easy for premiums to differ from one insurer to anther. They will attract different types of customer; their customers may live in different locations, they have earned different investment incomes, use different mortality tables, have different administration costs, have different aged customers in their fund, have higher or lower administration costs and offer different cover options.

Not only will each insurer differ in how profitable they are, they will also differ in how they calculate their premiums, at what point they require a medical, how much they think each additional cover option should cost and also which customers they want to attract and which they want to avoid. The end result is a very sophisticated market which is also highly competitive.

The life insurance premium you get charged could vary substantially from insurer to insurer. Why pay more for the same cover or even worse why pay more for less cover. So the first piece of advice I can give is ‘shop around’ or better still let someone shop around on your behalf.

This article was written on the 15th February 2007.

This article does not represent ‘financial advice’ as each persons individual requirements will be unique to their needs. If there is something in the article which you which to rely on then please check those details with any person from whom you purchase a term life policy at the time of purchase.

Related Insurance News

Both comments and pings are currently closed.

Comments are closed.