Medical Underwriting

Insureds die only once, but they can be disabled over and over.  Not unexpectedly -- and as a result of that difference -- disability income insurance underwriting and life insurance underwriting are substantially different from one another.  

The difference in life insurance and disability insurance underwriting is immediately evident in their respective results.  Although industry averages tell us that more than 90% of life insurance policies are issued as applied for, disability income underwriting statistics are much lower. In many companies, only 75% of disability income policies are issued as applied for.  

But, what happens to those applicants whose policies are not issued as applied for? Generally, a company has 3 approaches to dealing with substandard risks:

Reject the risk
Charge an increased premium, or
Exclude or limit coverage for specific conditions or activities

The option that all parties generally seek to avoid is rejection of the risk.  In such a case, everybody loses.  The agent loses compensation, the insurer loses potential profit and the applicant loses important coverage.  Not surprisingly, most insurers will try to choose another alternative except in the most obviously uninsurable situations.

 The alternative of charging an additional premium to account for the increased risk is the one that is generally the most favorable for the proposed insured.  By paying an increased premium -- which may be surprisingly modest -- the insured receives full coverage.

The third alternative is to exclude the additional risk that concerns the underwriters or limit the coverage for it.  The additional risk factor may be the proposed insured's new cliff-scaling hobby, or it may be a recurrent medical condition.  

Suppose, for example, that the proposed insured qualifies for disability income insurance at standard rates except for his hobby.  His hobby of climbing sheer cliff faces creates an uninsurable situation.  In this case, there is an obvious alternative: exclude any disability resulting from injury sustained while cliff climbing.  The rider excludes the proposed insured's hobby, and the insured would be asked to accept the exclusion at the time the policy was delivered.

Chronic medical conditions can be resolved through a somewhat similar approach. One of the most common situations that disability income insurance underwriters face is the proposed insured with chronic back problems.  One method of handling the additional risk caused by this chronic condition is to specifically exclude it by rider.  

Insurers may exclude a chronic back condition through a broad back rider or a narrow back rider.  Both agents and applicants need to be aware of the significant coverage differences that result.  A too common underwriting method of dealing with an applicant with a lower back problem is to exclude any and all disabilities resulting from injury to the insured's back.  This type of exclusion rider is known as a broad back rider since injuries to the entire back are excluded from coverage.  

A different approach would exclude only those injuries to the specific area of the insured's back that presents the problem for the underwriter.  For example, the rider might exclude any and all disabilities resulting from pain in the lumbar-sacral area.  By employing this approach -- generally known as a narrow back rider -- the policy would cover any disabilities caused by an injury to any other part of the insured's back.

When we looked at elimination periods, earlier in this course, we noted that split elimination periods are sometimes used to resolve underwriting concerns.  A split elimination period is simply an elimination period that is longer for disabilities resulting from a specific cause -- the cause that is a concern for the underwriter. Let's consider how a split elimination period might work for the applicant with a chronic lower back problem we just looked at.

Suppose that the applicant applied for a disability income policy with a 30-day elimination period.  Since he has a history of lower back pain, the underwriter may be willing to issue a policy only with a narrow back rider that would eliminate coverage entirely for the lower back condition.  The applicant certainly knows that his back problem may disable him and could find the exclusion unacceptable.

An approach that may resolve both the underwriter's concerns and those of the applicant is to make the coverage for any disability caused by injury to the lower back subject to a 180 day elimination period, rather than the 30 day period that applies to all other disabilities.  As a result, the disability income policy would be issued with a split elimination period: a 180 day elimination period for the condition causing the underwriting concern and a 30 day elimination period for everything else.  

 Frequently, a split elimination period approach can make everyone happy.  Unfortunately, it is usually the agent that must act as the catalyst to make it happen.