The Importance of Long-Term Care Insurance Underwriting
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The Importance of Long-Term Care Insurance Underwriting
Some people who have unsuccessfully applied for life insurance incorrectly assume they could not qualify for long-term care insurance either. Despite the similarities, however, there are substantial differences in the risks and underwriting issues associated with the two lines of insurance.
Things To Know
- Sound underwriting is crucial to forecasting and setting adequate premiums.
- The underwriter’s biggest concern is the likelihood of an early, prolonged, debilitating mental or physical illness.
How insurance works: an overview
An insurance policy is based upon the transfer of risk of financial loss caused by specified conditions or perils from one party (the insured) to another party (the insurer). Underwriting is the process by which an insurance company evaluates the risks for which would-be customers want to buy coverage and determines which applicants will be accepted and rejected for policies.
The insurer maintains funds in reserve to pay for the future losses it will have to cover. The insurer will be able to make these payments, handle its own salary and overhead expenses, and earn a profit only by doing several things (among others):
- Making accurate long-term forecasts of the frequency and value of the losses from risks the company has chosen to cover
- Collecting sufficient premiums from a large enough number of customers exposed to the same kinds of risks
- Investing cash reserves prudently to earn extra income until needed
Sound underwriting is crucial to two of these three functions—forecasting and setting adequate premiums.
Factors to think about when considering underwriting
Will any auto insurance company cover a teenager who has already had two accidents? If so, at what price? Should a company issue a life or LTC policy for a healthy, 40-year-old non-smoker? What about policies for those not in perfect health, or smokers? Can someone with a strong family history of Alzheimer’s buy LTC insurance at any price?
Attitudes and practices on underwriting vary among insurers. Companies can reach different but reasonable decisions on a given application. For all insurers, however, underwriting is among the company’s most crucial business activities. From the underwriter’s perspective, people seeking LTC insurance present innumerable risk profiles that must be carefully considered.
What insurance companies fear most
The LTC insurance underwriter’s biggest concern is the likelihood of an early, prolonged, debilitating mental or physical illness. Factors that might contribute to the premature death of a policyholder, on the other hand, have no negative financial effect on the LTC insurance company. Conversely, the life insurer’s underwriting focus is the likelihood of premature death, not disability.
Of course, many medical conditions can lead to both disability and death. But even chronic illnesses do not always disqualify a LTC insurance policy applicant if they are under control.
An insurance shopper in that situation might get varying responses from different insurers. That is why it is wise to get advice before applying as to which of them might be most interested in issuing coverage.