Underwriting
Underwriting is the process by which an insurance company evaluates risk and determines whether to accept an application for coverage and at what premium rate.
🎬 Video Explanation
Exam Tip
Underwriting = risk assessment. Higher risk = higher premium. ACA prohibits health underwriting.
What is Underwriting?
Underwriting is the risk assessment process insurance companies use to evaluate applicants. The underwriter reviews information to decide if they should offer coverage and at what price.
The Underwriting Process
| Step | Action |
|---|---|
| 1 | Application review |
| 2 | Medical records/exam (if required) |
| 3 | Risk classification |
| 4 | Premium calculation |
| 5 | Policy issue or decline |
Underwriting Factors
Life Insurance:
- Age and gender
- Health history
- Family medical history
- Lifestyle (smoking, hobbies)
- Occupation
- Driving record
Health Insurance:
- Under ACA, major medical cannot use underwriting to deny coverage or charge more for preexisting conditions
Risk Classifications
| Class | Description | Premium |
|---|---|---|
| Preferred Plus | Excellent health | Lowest |
| Preferred | Very good health | Low |
| Standard | Average health | Standard |
| Substandard/Rated | Health issues | Higher |
| Declined | Uninsurable | N/A |
Types of Underwriting
| Type | Description |
|---|---|
| Full (Traditional) | Complete medical exam, detailed review |
| Simplified Issue | Health questionnaire only, no exam |
| Guaranteed Issue | No health questions, automatic acceptance |
| Accelerated | Uses data/algorithms for quick decisions |
Underwriting Principles
- Insurable interest - Must have financial stake
- Utmost good faith - Both parties must be honest
- Indemnity - Insurance restores, not enriches
Study This Term In
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Life & Health Insurance License Mastery 2025-2026: Complete Study Guide with 500 Practice Questions and Detailed Answer Explanations
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Premium (Insurance)
An insurance premium is the amount paid by the policyholder to the insurance company for coverage, typically paid monthly, quarterly, or annually.
Insurable Interest
Insurable interest is a legal requirement that the person purchasing insurance must have a financial stake in the insured person or property, ensuring they would suffer a genuine loss if the insured event occurs.
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