Financial Underwriting for Life Insurance in Australia

Financial underwriting is part of the life insurance process, and it's nothing to be concerned about.

In fact, it's in place to help you and your insurer.

This guide will explain what financial underwriting in life insurance is, and how it works.

What is financial underwriting in life insurance?

Insurers use underwriting to assess an applicant's level of risk.

Insurance is heavily based on risk.

If insurers regularly charged low prices and paid out a high number of claims, they'd quickly be out of business.

Underwriting is used to determine how much risk a person presents, and the likelihood that they'll need to file a claim.

The insurance benefit level and premium are then set accordingly.

Financial underwriting is used specifically to balance the amount of cover you want against your financial situation.

It helps people avoid being over-insured, which can lead to you paying more in premiums.

A financial underwriter will look at your financial information to confirm that the level of cover you're applying for makes sense when compared to your finances.

What is over-insurance?

Being over-insured may seem like a good thing, after all, it means a higher payout, doesn't it?

Higher benefits come with higher costs, like inflated premiums.

What's more, over-insurance isn't in an insurer's best interests.

Insurance is designed to cover the financial loss associated with the insured's death or inability to work.

If a person is over-insured, the insurer will in theory be paying out too much money.

Term life insurance isn't a windfall; it's a financial support mechanism for you or your beneficiaries if/when things go wrong.

When does financial underwriting apply?

Financial underwriting is usually applied to income protection cover.

Income protection is also known as salary continuance or salary replacement insurance.

If you are temporarily unable to work due to an injury or illness, income protection can replace up to 70% of your income for a set period of time.

Financial underwriting assesses your income to establish how much you are earning, and how much you can claim as a benefit should you need to.

Since it is possible to hold more than one income protection policy, it's important that the policies don't overlap.

If they do, you could wind up receiving more than your full salary, essentially profiting from your insurance.

Two Income Protection Policies

Courtney has two income protection policies: one through her superannuation fund and one is not. The policy through her super has a 30-day waiting period before she can claim, and she can claim for two years.

The policy outside of super has a two year waiting period before she can claim. Courtney would be able to claim the policy in her super first, when it ended, claim on the other policy.

Though it is more common to see financial underwriting with income protection, it may apply to other types of life insurance.

This could include term life cover, total and permanent disability cover, or trauma cover.

The financial underwriting process 

Financial underwriting in life insurance actually begins when you apply for cover.

You'll usually have to fill out an application form, which includes detailed questions about your medical history (more on that later) and financial situation.

Always answer these questions honestly and to the best of your ability.

People often think underwriting is designed to catch them out and deny them coverage, but it's there to provide a more accurate picture of your financial and medical situation.

If you file a claim and the insurer discovers that you have withheld information, there is a strong possibility that the claim will be denied.

A financial underwriter will assess your application and request further information to support the application as required.

He or she will look at details like your current income and debts, any assets you have, and other insurance you hold.

Many people don't realise that they already hold insurance through their superannuation policies.

These policies often don't offer much cover, possibly around $100,000 to $200,000, but you're paying a premium that is taken out of your super balance.

Financial underwriting can give you a clear picture of your finances, and may even open your eyes to cover you didn't know you had.

Financial underwriting

Step1: Complete application form for life over Step 2: Financial underwriter reviews form, requests further information if required Step 3: All details provided, final assessement conducted Step 4: Insurer provides final outcome of the underwriting assesement

What information do I need to provide?

Each application form is different, as is each individual's financial situation.

Your particular situation will dictate the type of information you need to provide.

For example, someone who is self-employed will have to prove their income differently than someone who is employed by a company.

You will likely have to provide information on the following:

• Income

• Debts (i.e. mortgage or credit card debt)

• Medical history

• Hobbies

• Occupation

• Other insurance you hold

• Regular expenses

Any information you provide is confidential and cannot be used or distributed by the insurer.

You will probably be asked for supporting documents to accompany your application. These may include:

• Proof of income

• Bank statements

• Home loan documentation

• Doctor's letter detailing medical conditions

• Other insurance policies, including benefit level

• Identification

• Proof of address

Will I need to do a medical?

Financial underwriting is concerned with your finances, not your medical history.

This means that you don't have to take a medical exam as part of financial underwriting.

So why are you asked to provide so much medical information?

Well, that's related to the medical underwriting process.

Financial underwriting VS medical underwriting

Medical underwriting in life insurance is a separate type of underwriting.

It is still a risk-assessment method, but it looks at your health, not your finances.

Medical underwriting is a common part of life insurance applications, no matter which type of insurance you wish to purchase.

A medical underwriter will look at the following when weighing up your risk:

• Current health

• Medical history

• Family medical history

• Whether or not you participate in extreme sports

• Occupation

• Age, gender & location

If you work in a hazardous occupation, enjoy extreme sports, or have pre-existing medical conditions, it may affect your premiums.

The medical underwriting process does not necessarily exclude you from getting cover, but it helps insurers work out the conditions of your cover.

Financial Underwriting vs Medical Underwriting

When shopping around for life cover, don't shy away from policies that require underwriting.

It's a normal part of the life insurance application process, and it helps ensure that you're getting a reasonable amount of coverage.

Remember to compare policies before you buy; it's a smart way to find comprehensive life cover at a lower price.

Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.

Meet our life insurance expert, Matthew Lang

Matthew's top life insurance tips

• 1

  Identify what you want out of life insurance before you buy. Knowing the purpose of your life cover will help you choose a policy that meets your needs.

• 2

  It's easy to assume that the sole purpose of life cover is to leave money behind for your family, but there's more to it than that.

• 3

  Life insurers like those on our panel pay an average of 97% of claims in full.

• 4

  There are different types of life insurance, including term life insurance, income protection, trauma cover and total and permanent disability cover.