When you apply to buy life insurance, you go through an approval process called underwriting. This is when the insurance company decides whether to offer you coverage, what the conditions are, and how much you’ll pay. The evaluation often costs the insurer hundreds of dollars but there’s no charge to you.
Scrutiny increases as the desired amount of coverage increases. Since permanent life insurance allows tax-sheltered growth, there are more questions that have to be asked to comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
The underwriting questions may seem daunting. You may think some aren’t relevant. Regardless, it’s very important that you answer accurately and disclose material facts.
What are the common questions? For simplicity, let’s assume that you’re applying for life insurance on your own life.
The basic questions
The insurance company will want to know your:
- name and date of birth;
- occupation, employer, and social insurance number; and
- home address and how long you’ve lived there.
Government-issued photo ID may be required to verify that you really are you.
What do you want to buy?
Life insurance companies use the same application forms for different products. They need to know the specific product and amount of protection you want (e.g., term life insurance with $1 million in coverage).
Why are you motivated to buy?
Life insurance is considered a product that’s sold, not bought. If you’re eager to buy, the insurance company make be suspicious. They want to know what’s motivating you. Some reasons like marriage or birth of a child are common.
Who are your beneficiaries?
Who receives the death benefit? You can designate more than one beneficiary and specify the portion each receives. Making the beneficiary revocable lets you change your mind later. If irrevocable, you need permission from the beneficiary first. Since the beneficiary could die before you do, you can specify a contingent beneficiary, too.
What other insurance do you have?
To prevent from being over-insured, you’re asked about:
- insurance you already have (type, amount, insurance company, when purchased); and
- insurance you’re applying to buy from other companies.
What’s your financial situation?
The insurance company asks about your assets and liabilities to determine if the amount of life insurance you want is reasonable. Approximations are usually acceptable. If you’re younger with children and a mortgage, that’s fine. Insurance is often still available to help build your estate to cover your obligations.
What’s your health like?
If you’re buying an iPad, your health doesn’t matter to Apple. If you’re buying life insurance, your health is very important. You’ll be asked about:
- height, weight, family health history;
- smoking (including marijuana) and drinking;
- any criminal offences or licence suspensions; and
- your most recent doctor’s visit: date, reason for going, if you received a prescription, and the outcome.
Depending on your answers and the desired amount of coverage, your answers may be verified with a paramedical examination or by your doctor (an attending physician’s statement).
If you don’t feel comfortable answering medical questions in front of your advisor, you may be able to answer them in private through a tele-interview or paramedical examination.
Tip: You may be asked to provide blood or urine for testing. If that makes you uncomfortable, you could look for life insurance with simplified underwriting. You pay more for this convenience.
What other activities do you do?
Some activities affect your chances of injury or death. If you skydive or drive race cars, you may face exclusions, get charged extra (a rating), or be declined. Your recent and planned foreign travel are also considerations.
How will you be paying?
The insurance company wants to know how you’ll pay for your premiums, whether it’ll be by cheque or pre-authorized withdrawals from your bank account.
Do you need temporary insurance?
If you qualify, the insurance company may offer you temporary life insurance at the time you apply and before approving you for regular insurance. The application form will state the conditions.
You sign the application to confirm that you understand the questions and have answered them correctly.
You can get the application form in advance from your advisor or the insurance company. Some sections may not apply to you. Additional forms may be required. Underwriting requirements differ by company and you might want to compare them before you apply.
Flickr: Véronique Debord-Lazaro