What is Financial Underwriting?

Everyone knows that you have to be medically underwritten for term life insurance, but did you know that there is financial underwriting as well? In all cases, the life insurance underwriter much establish that the amount of insurance applied for will cover beneficiary in the event of an untimely loss. However, there are limits to the amount of insurance that an individual can qualify for. Usually, financial underwriting is based on a number of factors like net worth, age, and annual income, but additional items may be analysed.  The following are some of the criteria that are taken into consideration when financial underwriting is used.

Financial Underwriting usually caps the amount of life insurance you can get

Financial underwriting is primarily used to make sure that the person who is being insured qualifies for an amount of insurance that does not exceed their insurable interest. The insurable interest means that there is a firm reason behind the amount of life insurance that is being applied for. Typically, this means that the amount of insurance that is available to any application is capped at a certain point, over which they have no real justification for coverage.

For example, a family with a household income of $50,000 could not qualify for 10 million dollars worth of coverage from a financial underwriting perspective, even if they could pay the term life rates. In this case, there is no reason that this family would need 10 million dollars to replace the life of a family member, as the insurance would provide much more of a windfall if something happened to the insured. Life insurance is not meant to provide for an extravagant lifestyle in the event of a death, only for the family to be protected in case of the demise of a loved one.

Financial Underwriting and Annual Income

Typically, the first thing that underwriters look for when conducting financial underwriting is an individual’s or family’s annual income. The thinking behind this is that for a family to be adequately covered, they will usually need to be covered for a multiple of income, usually 12 to 15 times the breadwinner’s salary. As mentioned before, while this is the recommended amount, an underwriter will not deny life insurance coverage based on getting too little coverage.

Financial underwriting and Net Worth

In addition to annual income, underwriters also look at a person or family’s net worth in justifying the amount of insurance an individual is applying for. If an individual is applying for a face amount that exceeds the amount of justifiable salary requirements,  the person’s net worth can help to provide the additional basis needed to meet the financial underwriting requirement.

In addition, net worth plays an important role in estate planning, whereby life insurance is used to cover estate taxes, which in 2011 will revert to around 50% of the deceased’s assets over a certain amount. Financial underwriting is used to qualify for the amount of the tax, once again, not to provide some type of windfall.

What are the financial underwriting limits?

As previously mentioned, you can only qualify for so much life insurance from a financial underwriting perspective. So what are the general guidelines for these numbers? There is no firm rule, but most companies will go up to about 20 x your income, with a few going a tad bit higher if you have a young family. Banner life insurance will go up to 25x income if you have very young children. As you increase in age, and your obligations become less, the amount of insurance in relation to income tends to decrease.

For estate planning purposes, the life insurance companies will usually go no higher that 60% of your net worth, as that would cover the maximum amount of taxes due for your estate.

Please feel free to contact us if you have any other questions about your individual situation and financial underwriting