Insurers develop their own specific guidelines for the underwriting process of disability insurance. However, what they all have in common is the criteria they use to determine eligibility, coverage type and amount, and rate. The following is a list of the key factors that help insurers make these decisions:
- Age and gender – Younger applicants will pay less for coverage. Females typically pay more than males because they file more claims.
- Occupation – Insurers examine both your job title and your specific duties to decide the type of coverage to extend you, and cost. Certain occupations because of the nature of the duties performed pose less risk than others.
Insurance companies group occupations together according to the level of risk they present, and they assign each grouping a rating class. This rating, represent by either a number or letter, indicates how hazardous the occupation is, the income level of individuals in the occupation, and the number and type of claims filed historically.
- Income – This is a determinant of the type of coverage you are eligible for, the amount of your monthly benefit, and your rate. Insurance companies use tables to decide how much monthly benefit you can receive based on your earnings. Insurers generally will issue at most 50 to 70 percent of your pretax earnings. This percentage will be higher if your income is low, and lower if your income is high. You will be asked to provide an income tax form or W2 as proof of your earnings.
Your level of income also affects the type of coverage you can buy. High income individuals can usually purchase policies with a broader definition of disability and more comprehensive coverage.
- Medical history – Insurers will look at both the current state of your health and your health history to decide your eligibility. Your family’s medical history will be explored to see if you have a predisposition for certain medical conditions, like diabetes, heart disease, or cancer.
In addition to the questions about your health, you will either be asked to take a paramedical examination, which includes a blood test and a urinalysis, or a full physical examination.
- Lifestyle – The type of activities you take part in can increase your chances of suffering a disability. Not only does the insurer ask you directly about your activities, but it may also get information from databases, credit bureaus, and other organizations. It can even question your friends and family.
After your insurance agent has gathered all of this information, it’s reviewed by a home office underwriter. Either you will be issued coverage right away, or you will be asked to submit additional information to determine whether you are an acceptable risk.
You will be assigned to one of three risk categories:
- Preferred risk – You are less likely than other insureds to file a claim. Preferred risk status means you will pay less for coverage.
- Standard risk – This is the category assigned to most insureds. Being designated a standard risk means you are no more or less likely to file a claim than any other insured.
- Special or substandard risk – Assignment to this category means that the insurer feels that there is a high probability that you will file a future claim. If the insurance company decides to issue coverage, they will do so with the inclusion of an amendment that either fully excludes certain medical conditions or excludes them for a period of time. Your policy will have a longer elimination period, and a shorter benefit period. The rates charged to special risk insureds are much higher than for the other two categories.