When the insured’s term policy expires, will he/she have to go through the
underwriting process again?
􀂃 There are policies that contain the renewal option i.e. the insurance company will
renew the policy when it expires without having to resubmit to the underwriting
process. This means that the renewal will be done at the same premium rate,
even if the insured’s risk factors have changed (e.g., his/her health has declined)
since the company sold the original policy.
􀂃 If the insured’s policy doesn't contain this provision, he/she will have to reapply for
term insurance when the policy runs out and undergo what is known as postselection
underwriting. At this time, the company has the right to deny the insured
continued coverage. Even if they don't deny the insured insurance, it's likely they
will at least put him/her in a higher risk group and raise the premium based on
his/her increased age.
􀂃 Remember, though, if the company that wrote the original policy won't renew the
policy or will do so only at a higher rate than the insured or policy owner wants to
pay, the insured should shop around. Other companies may have less stringent
underwriting standards.
PREMIUMS
Premiums
Premium is defined as the consideration which an insured pays to the insurance
company in return for insurance protection. It follows, then, that for an insurance
company, this is a source of revenue; and the insured will incur the cost of the
premium in return for insurance.
There are two standard ways of making premium payments:
􀂃 A single lump sum payment
􀂃 Periodic payments
Of the two, the Periodic payment of premium is more popular, primarily because:
􀂃 There is a large payment required upfront in the case of the lump sum option
􀂃 In case the insured dies early on in the insurance term, the amount paid for
the insurance under the installment method will be less than the single
payment.
Determination of Premiums
• For a prospective client, one of the major criteria for selecting a company is the
amount of premium that has to be paid. For the insurance company, therefore,
the premium must be high enough to be able to cover the cost of issuing the
policy and other administrative costs, but still be able to compete in the market.
• The determination of premium rates is dependant on the following factors:
􀂃 Mortality – The percentage of the insureds that are expected to die in the
future.
􀂃 Investment – The quantity of return the company expects to make on the
amount of premium collected.
􀂃 Operating Expenses – Expenses incurred in the running of the business,
including all commissions etc.
􀂃 Contribution to Surplus – The difference between the premium earned and the
expenses paid.