Decoding Disability Insurance Underwriting

Underwriting continues to be one of the most challenging parts of insurance to understand.

You might have sold a few life insurance policies. You may feel like you’re getting the hang of it, only to switch carriers and be presented with a whole new set of guidelines.

Now consider branching out from life insurance to another product, like disability insurance (DI). You might be tempted to throw in the towel before you even start.

With a little background, though, getting the desired underwriting result is well within reach. The key is to understand the underwriter’s goal. From there, the pieces start to come together, and a picture can be formed.

Mortality vs. Morbidity

In any insurance case, you’re trying to transfer the risk of an event from your client to an insurance carrier. The carrier, of course, is going to be selective as to which risks are appropriate for them to take on.

When it comes to underwriting for life insurance, the risk is that the client will die earlier than expected. Life insurance underwriters are focused on mortality — how likely any individual is to live an average number of years.

Knowing that, it makes sense that family history and certain severe health conditions come into play. Same with risky behavior. Does your client skydive on the weekend? Red flag for life underwriters. Do they have a family history of early death? Potentially another red flag, if they are genetic. Lots of speeding tickets or driving violations? You get the idea.

mor·bid·i·ty: the condition of suffering from a disease or medical condition.

When it comes to disability insurance, though, underwriters aren’t really worried about the insured dying. They are concerned about them becoming disabled during their working years. They are looking at morbidity — whether or not the client is likely to have an accident or illness.

So, while an early death isn’t a factor, the client’s occupation and their day-to-day activities matter a lot. Does the client work in a dangerous occupation? That’s going to make a difference. But skydiving on the weekends? Not so much.

One Client, Two Different Underwriting Classes

Knowing life and DI underwriters are looking at different goals, it makes sense that rates differ as well. A client might get Preferred Plus for life insurance, but not for DI. Or vice versa.

Let’s look at a quick example. Consider a desk-bound software developer and a factory worker who are the same age and in similar health. For life insurance, they have a good chance of both receiving the same rate. But their disability insurance premiums will tell a different story. The risk of an injury in the factory puts the second worker in a different category altogether. Disability insurance takes a tailored approach toward occupational risks.

Don’t assume a “healthy client” for one product will get top rates for another. Disability insurance premiums will tell a different story.

Knowing what underwriters are looking for, you can make a strong case for talking about BOTH products with your client. Explain the need to be protected with both income replacement and income protection. The good news is that there are some common concerns between them.

So, you can have one conversation about underwriting and then collect the information needed for both products. To do that, we need to look at both how life and DI underwriting differ — and where they overlap.

Understanding Underwriting Differences

The distinction in how health and medical conditions are evaluated between life and DI underwriting emphasizes the need for a tailored approach when talking to your clients. By explaining the nuances between the products, you will be able to empower them with knowledge to secure comprehensive coverage that addresses the full spectrum of risks they face.

Let’s look at how underwriters for each product look at some of the most common factors.

Age

With life insurance, there’s usually a straightforward approach of “the younger the better.” While other factors may increase life insurance premiums, age is the starting point based on a lower mortality risk.

Don’t assume that just because a client is younger and rated well for life insurance it will carry over for disability insurance.

Disability takes a more granular approach. Intuitively, it can be easy to assume that the closer a person gets to retirement, the less important disability income replacement becomes. But, the closer a person gets to retirement, the higher the chance a disability will incur. Therefore, while age is a factor in disability underwriting, there’s some nuance to how it affects the price your client will pay. A preferred nonsmoker for term insurance may not secure the best income protection rates due to age-related disability risk factors.

DI policies may also limit the maximum issue age more strictly than life insurance, reflecting the higher risk of disability.

Health & Medical Conditions

Certain conditions are known to shorten life expectancy. For life insurance, a history of these diseases will greatly impact risk and lead to higher premiums or even a decline. It’s a direct correlation — health risks that may lead to an early death make life insurance coverage more complex and costly to solve.

Clients with pre-existing or medically uninsurable conditions may still be able to be insured — call us for a consultation!

For disability, only conditions that may affect someone’s ability to do their job are emphasized. Anything that affects quality of life, mobility or daily activities — including mental health — are concerns. Underwriters are evaluating a capacity to earn. A condition like chronic back pain may not significantly impact life expectancy. But in the disability insurance story, it becomes a leading character for influencing premiums or policy terms.

Occupation

In life insurance, occupation might influence premiums if the job carries inherent risks. In disability, occupation directly impacts the likelihood and potential severity of a claim.

For DI coverage, occupations are grouped and priced by the varying risk of disability. For example, a construction worker faces higher DI premiums due to occupational hazards. The type of job introduces an interesting dynamic where physical risks may be lower, but cognitive demands are high. Underwriters take a nuanced perspective on what risk entails in the context of disability insurance.

The length of time at a current employer and conditions of employment are also considered.

Income Level

Insurance is meant to protect against financial loss. Financial underwriting ensures an individual’s amount of coverage is consistent with what they could have earned in their lifetime.

For life insurance, a person’s income level helps determine a suitable death benefit to replace lost earnings for beneficiaries. Income verification is required to prevent over-insurance. However, premiums are not directly adjusted based on income levels.

In disability insurance, income levels are especially crucial. Underwriters are calculating the benefit amount necessary to maintain a standard of living. High-income professionals may seek higher DI coverage for income protection.

For any disability policy, underwriting involves detailed income verification to establish the benefit amount.

The underwriter will need to have your earnings from the current year, as well as the past two years. Self-employed individuals may face more scrutiny to accurately assess income and benefits.

Finding Common Ground

Both life and disability insurance underwriting share a foundational concern for the applicant's health and lifestyle choices. This common ground stems from the universal impact on an individual's risk profile — whether it be the risk of death or a condition that affects their ability to work.

Factors that can significantly elevate the risk of both premature death and disability are key to both types of insurance. A history of smoking, for instance. High blood pressure. Certain medications.

Advisors who frame underwriting holistically create an ideal cross-selling advantage.

Moving forward, why not bring up both life and DI together? By emphasizing the shared relevance of this data, you can streamline the conversation. Make it clear that a comprehensive approach to health evaluation benefits many foundation aspects of financial planning.

It’s common to start the conversation with life insurance, not even mentioning protection against a disability. If that’s the case, the information collected for life can be a good starting point for an income protection conversation. After all, you already have the client’s age, occupation, income level and basic health information — all good determiners of whether the client is a good candidate for a discussion about DI.

With a single conversation, you’ll be covering two distinct risks while respecting your client’s time and increasing your value as a trusted partner.