Underwriting in Life Insurance

Underwriting in life insurance is one of the most critical parameters based on which the risk and premium of a policy is decided. Understand what it is, and how it works.

Introduction

When we think of buying life insurance, we often compare premiums, sum assured, or policy benefits. But behind the scenes, there's a crucial process that decides if you’re eligible, how much you’ll pay, and what conditions may apply — this process is called underwriting.

Underwriting is the invisible engine that keeps the insurance ecosystem running fairly. Understanding this step can help you buy the right policy at the right cost — with full awareness.

Let’s break it down in simple terms.

What is Underwriting in Life Insurance?

Underwriting is the process used by life insurance companies to:

• Evaluate your risk profile

• Decide whether to approve your application

• Determine the premium you should pay

• Add any special conditions or exclusions to your policy

It’s like a health and lifestyle background check, done to ensure that your life insurance cover is priced fairly and sustainably.

Why is Underwriting Important?

• Helps insurers maintain financial stability

• Prevents fraudulent claims

• Allows fair pricing for everyone

• Protects other policyholders from cross-subsidizing high-risk individuals

Factors Considered in Underwriting

Underwriters consider various data points about you:

• Age

• Gender

• Medical history – including pre-existing illnesses

• Current health condition – often confirmed via medical tests

• Lifestyle habits – smoking, alcohol, drug use

• Occupation – especially risky professions

• Hobbies – like mountaineering or scuba diving

• Family medical history – especially hereditary diseases

Types of Underwriting

1. Medical Underwriting

   • Requires medical tests

   • Common for higher sum assured policies

   • Includes ECG, blood tests, etc.

2. Non-Medical Underwriting

   • For low sum assured plans or younger applicants

   • No physical tests required; relies on declarations

3. Guaranteed Issue Underwriting

   • No questions asked

   • Higher premium

   • Often offered by group insurance providers

4. Simplified Issue Underwriting

• Limited health questions

• No medical tests

• Used for faster issuance

What Happens If You Lie During Underwriting?

• Your claim can be rejected later due to non-disclosure or misrepresentation

• Even one missed fact (like tobacco use) can lead to policy cancellation

• Always disclose truthfully — it’s better to pay a bit more now than lose everything later

Example: A Real-Life Indian Scenario

Ramesh, a 40-year-old salaried professional from Mumbai, applied for a term insurance policy with ₹1 crore cover.

He declared his health conditions honestly and underwent medical tests. The reports showed mild hypertension, which he was treating with medication.

The underwriter:

• Approved the policy

• Added a small premium loading of ₹500/year for the hypertension

• Issued the policy without any exclusions

Had Ramesh not disclosed his condition, and later died of a stroke, his family's claim could have been rejected due to non-disclosure.

Tax Implications for Indian Policyholders

• Premiums paid towards life insurance are eligible for deduction under Section 80C (up to ₹1.5 lakh per annum).

• The maturity amount is tax-free under Section 10(10D) provided:

  • The premium is less than 10% of the sum assured for policies issued after April 1, 2012

• If underwriting leads to higher premiums (due to medical risks), ensure they still comply with Section 10(10D limits

• GST is applicable on premiums — 4.5% for first year, 2.25% thereafter (for term insurance)

Precaution:

If your premium crosses 10% of the sum assured, the maturity benefit may become taxable. Always check with your insurer or advisor before finalizing the policy.

Summary

• Underwriting is the decision-making process behind your life insurance policy

• It protects both the insurer and the policyholder from unfair risks

• Being honest during underwriting leads to smooth claim settlements

• Understanding underwriting helps you make better insurance decisions

References

• Related Blogpost: Term Insurance Vs Whole Life Insurance
• Related Book: From the Rat Race to Financial Freedom
• Related Blogpost: Surrendering your Life Insurance Policy