Life Insurance Underwriting

After you sign a life insurance application, the insurer has to decide whether it will take on the risk of your death, and on what terms. That review is underwriting. In a typical file you apply, the insurer reviews your answers and outside records, orders any tests or doctor's reports it needs, looks at your finances for larger amounts, and makes a decision you can accept or refuse. The steps below show who does what at each stage. The order can vary by insurer, and not every file goes through every step.

Two rules sit underneath all of it. You must answer truthfully. And no insurer may require you to take a genetic test or to share its results. Knowing both before you sign protects the claim your family may one day make.

The steps of life insurance underwriting, one by one

The table sets out a common sequence for a fully underwritten individual policy on a Canadian resident. Some insurers run several steps at the same time, and some decide simple files at the first review without any fluids. Depending on the insurer, your age, the amount and your history, a step may be skipped or added.

Your advisor does not underwrite. The advisor helps you complete the application, arranges the exam and follows the file. The decision belongs to the insurer. Until the policy takes effect, the only coverage in place is whatever a temporary insurance agreement provides, if one was issued.

Full, accelerated, simplified or guaranteed: which kind of underwriting?

Not every policy is underwritten the same way. The four broad types below differ in how much the insurer asks, and in how much coverage it will give without asking more. Which types an insurer offers, and the limits on each, are set by that insurer for each product.

Full and accelerated underwriting let the insurer price your own risk, which is how an individual class such as preferred is earned. The shorter routes trade questions for price and amount. Compare what each one would cost you for the coverage you actually need before you choose.

What must you disclose, and what may an insurer not ask?

Start with the protection. Under the federal Genetic Non-Discrimination Act, no one may require you to take a genetic test, or to disclose the results of one, as a condition of entering into or continuing a contract, or of offering you particular terms. Nor may anyone doing so collect, use or disclose your genetic test results without your written consent. The Act defines a genetic test as one that analyzes DNA, RNA or chromosomes for purposes such as predicting disease. What that leaves an insurer free to ask, including family history, is covered on the Genetic Non-Discrimination Act and what an insurer may ask.

Then the duty. In Quebec, article 2408 of the Civil Code of Québec requires the policyholder, and the insured if the insurer asks, to declare every circumstance they know that is likely to influence an insurer materially. That means anything that would weigh in setting the premium, assessing the risk or deciding to accept it. They need not declare what the insurer knows or is presumed to know because it is common knowledge, except in answer to a question. In the other provinces, the life insurance part of each provincial Insurance Act sets a comparable duty for the applicant and the person to be insured.

Three practical points follow.

• The duty is yours, not your advisor's. An advisor can explain a question. Only you can answer it.
• The duty can reach past the questions. A form asks about named conditions. A symptom being investigated, with no diagnosis yet, can still be a fact likely to influence the insurer, so declare it and let the insurer weigh it.
• When the owner and the person insured are different people, check which declarations each one is asked to sign. In Quebec the policyholder declares, and the insured declares as well if the insurer requires it.

The consequences can be serious. In Quebec, article 2410 lets the insurer ask for the contract to be annulled for a misrepresentation or a concealment, even for a loss unrelated to the fact misstated. That rule is subject to the separate provisions on the declaration of age and of the risk. A wrong age is treated differently: under article 2420, it does not annul the insurance, and the amount insured is adjusted in the proportion that the premium collected bears to the premium that should have been collected. The common-law provinces have their own rules to a similar effect. How each case plays out is set out on misrepresentation on an application.

What does the paramedical examination measure?

A paramedical is a short appointment with a nurse or technician, often at your home or office. Whether you need one, and which tests it includes, depends on the insurer's own requirements for your age, the amount and your answers. Some files need none at all.

Results are read against the answers you already gave. A condition you disclosed is an underwriting question. The same condition left off the form becomes a question about the whole application. You can ask the insurer for a copy of your results. Each measurement, and what an out-of-range result does to a file, is explained on the medical and what it measures, and how the nicotine tests set your class is on smoker status and the premium.

Why might the insurer ask your doctor for records?

An attending physician's statement is a report the insurer requests from a doctor who has treated you. It is asked for when your answers or your results raise something that needs history rather than a snapshot. Some insurers also request one above certain ages or amounts; the thresholds are theirs.

What it contains. Consultation notes, test results, prescriptions and the doctor's summary, over a period the insurer chooses. It can include notes you have never read.

Why it can take a while. The insurer sends a request to a clinic that has its own workload, and then waits. When a file needs one, it can be the step that takes the longest.

What you can do. Name the right clinic and doctor on the application. Sign the authorisation correctly the first time. Mention every specialist you have seen, so the insurer does not find one later. If the file stalls, you can call the clinic and ask whether the request arrived.

What is MIB, and what does it hold?

MIB is an information exchange that life insurers in Canada and the United States can join. With the consent you sign on the application, a member insurer may report coded information it finds significant, and may check MIB when you apply elsewhere. On its own website, MIB describes its role this way:

• You have an MIB file only if you applied to a member insurer in the last seven years and information of underwriting significance was found.
• Each code stands for "a medical condition, hazardous vocation or other factor" that can affect insurability.
• The codes do not show what another insurer decided: not an approval, a decline or a rating.
• MIB says its codes are not used to decide eligibility, and that members may not make an underwriting decision based on your file without further investigation.
• Canadian residents can ask for a free copy of their file once a year, and for another free copy after an insurer sends an adverse underwriting decision letter.
• For Canadians, the file lists the insurers that made an inquiry about you over a two-year period.
• You can ask MIB to correct information that is inaccurate or incomplete.

To ask for your file, use the request process on MIB's own website or its phone line. The decision itself stays in the insurer's own file. Later applications at other insurers may ask directly whether you have been rated, postponed or declined, or whether you have an application pending. Where a form asks, answer accurately.

Why does an insurer ask about income, net worth and your money?

Three different reasons sit behind the financial questions, and it helps to keep them apart.

1. Financial underwriting. An insurer wants the amount of coverage to match a financial loss or need your death would create: lost income, debts, a tax bill at death, a business obligation. Each insurer sets its own limits, for instance a multiple of income that falls as you age. For a large amount, expect a request for tax returns or financial statements.
2. Insurable interest. Separately, the owner of a policy on someone else's life must meet the insurable interest rules of the province, and the consent of the person insured matters. That is a legal requirement, not an underwriting judgment. It is explained on financial underwriting and insurable interest.
3. Anti-money-laundering rules. Life insurance companies, brokers and agents have obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. FINTRAC lists them: verifying identity for certain transactions, keeping records and filing reports. That is why you may be asked for identification and, for a large deposit, where the money came from.

What decisions can come back?

The decision falls into one of five groups. Some of them take more than one form.

The offer that arrives is not always the one you applied for, and accepting it is your decision. What each outcome means over time is set out on rated, postponed or declined.

Are you covered while the file is open?

Applying does not, by itself, put the policy you applied for in force. Some insurers offer temporary coverage while underwriting runs, under a separate agreement that may require the first premium to be paid with the application. Its terms are that insurer's own, and they differ. Before you rely on it, read the form and check:

• the eligibility questions it asks, which are separate from the application and must be answered accurately;
• the maximum it pays, which can be less than the amount you applied for;
• the day it starts, and every event that ends it, such as issue, decline, withdrawal or a set number of days;
• the payment it requires, and what happens to that payment if no policy is issued;
• any condition on what it pays, for instance whether you would have qualified under the insurer's own rules.

Ask the insurer, or your advisor, to confirm in writing whether a temporary agreement is in place and when it ends. If none is in place, keep any existing coverage until the new policy has taken effect.

When does the policy take effect?

In Quebec, article 2425 of the Civil Code says life insurance takes effect when the insurer accepts the application, as long as three things are true. The insurer accepted it without modification. The first premium has been paid. And nothing has changed in the insurability of the risk since the application was signed. A rated or modified offer is not an acceptance without modification, so it depends on your accepting the change, usually in a signed amendment. In the other provinces, the provincial Insurance Act and the application or policy set the conditions. Those can include delivery of the policy, payment of the first premium and no change in insurability, so ask the insurer which conditions apply to your contract.

The practical rule is the same everywhere. If anything about your health changes after you sign, such as a new symptom, a new test, a referral or a diagnosis, tell the insurer in writing before you accept the policy, and keep a copy. The two-year contestability period described below runs only once the insurance is in force, so a long underwriting process does not count toward it.

How long does underwriting take?

No single answer fits every file, and a number quoted in advance can mislead. The time depends on how much evidence the insurer needs and on who has to supply it. A file decided at the first review can close quickly. A file that waits on a clinic's records, a specialist's report or a reinsurer takes longer. A file paused for a test result is correctly paused, not lost.

These questions give you the answer for your own file. Put them to your advisor, who can put them to the insurer:

1. What is still outstanding on my file?
2. Who has to supply each item: me, the examiner, a clinic or the insurer?
3. When was each item requested, and has it arrived?
4. Is my file being sent to a reinsurer, and if so, why?
5. Is any temporary coverage in place, and on what day does it end?
6. When does the insurer next plan to review the file?

Incomplete answers slow a file down, because a question sent back for clarification waits its turn in a queue. Foreign residency, recent or planned travel and a hazardous occupation can each add questions. How an insurer looks at them is covered on travel, residency and occupation.

What to do if you are rated, postponed or declined

A disappointing decision is not the end of the conversation. Work through these steps in order.

1. Ask for the reasons in writing. Name the decision, its date and the application number, and ask which records the decision relied on. Where a medical report drove it, the insurer may release that report to a doctor you name.
2. Ask for your personal information. Canadian privacy law lets you ask the insurer for the personal information it holds about you, and ask it to correct what is wrong or incomplete. Ask MIB for your file too.
3. Check the facts. Confirm the insurer read the right chart, the right dates and the right relatives. Which relatives the family history questions reach, and why the age at diagnosis matters, is explained on family history on an application.
4. Answer with evidence. A specialist's letter, a repeat test after treatment or a record of stable control can change an offer. An objection without evidence gives the underwriter nothing new to weigh.
5. Ask about reconsideration. Some insurers will review a rating later, on request, once there is evidence that its reason has changed. Ask what evidence and what period they would need.
6. See a lawyer promptly if coverage or a claim is at stake. Time limits for going to court apply, and they run while you wait.

Two more options remain. You can apply to another insurer, because underwriting standards differ. Later applications may ask about earlier decisions and pending applications, so answer accurately, and ask your advisor which insurer's approach fits your history before a new formal application. Or you can reduce the amount: a smaller contract at a rated price may fit a budget that the full amount does not. How a premium is built is set out on what an insurance premium is made of.

How long can an insurer contest the application?

In Quebec, article 2424 of the Civil Code of Québec sets the rule. In the absence of fraud, a misrepresentation or a concealment about the risk cannot ground the annulment or the reduction of insurance that has been in force for two years. The article makes an exception for disability insurance where the disability began during the first two years.

In the common-law provinces, the Insurance Acts set a comparable limit, commonly expressed as two years during the lifetime of the person insured. That wording matters. If the person insured dies within the first two years, the insurer may still be able to rely on an innocent misstatement when it assesses the claim, even after the second anniversary has passed. A lawyer in the province can say how the statute applies to a particular file.

Four points hold in both systems.

• The clock starts when the insurance is in force, not on the day you applied.
• Fraud is outside the limit. Time does not protect a deliberate misstatement.
• Age has its own rule, set out in the disclosure section above.
• A reinstatement can start a new period for the statements you made to reinstate a lapsed policy.

Is the suicide exclusion a separate clock?

Yes, and in Quebec it is set by statute, not only by the contract. Article 2441 of the Civil Code of Québec says an insurer may not refuse to pay because the insured died by suicide unless the contract expressly excludes that case. Even then, the exclusion has no effect if the suicide occurs after two years of uninterrupted insurance. An increase in coverage is subject to the original exclusion, for the added amount only, for two years of uninterrupted insurance from the date the increase took effect.

Outside Quebec, read the exclusion in the policy and the provincial Insurance Act that governs it. Do not assume it has the same starting point or the same effect as the contestability rule.

If you or someone you know is thinking about suicide, call or text 9-8-8.

What changes for a large participating policy funded above its base premium?

The medical evidence does not change. Four other things do, and each limit has its own source.

• The amount of coverage is set by the insurer's financial underwriting. A policy designed to take deposits above its base premium still needs a death benefit the insurer will justify on your income, net worth and purpose.
• The ceiling on deposits comes from a tax regulation. The exempt test is in section 306 of the Income Tax Regulations. It measures the policy's savings against a benchmark tied to its coverage, so a larger death benefit allows more room for deposits.
• The tax cost of failing the test is set by statute. Under section 12.2 of the Income Tax Act, the owner of a policy that is not exempt includes in income, each year, the amount by which its accumulating fund on the policy anniversary exceeds its adjusted cost basis. That is a federal rule, and Quebec residents also file a Quebec return with Revenu Québec.
• What happens to a deposit that would exceed the limit is set by the contract. Depending on the insurer, the contract may refund it, apply it another way or use another mechanism. Ask for that provision in writing before you apply.

A rating changes the design as well as the price. A higher insurance cost inside the contract means the same outlay supports less coverage, and less coverage leaves less room under the exempt test. Ask for a new illustration before you accept a rated offer. The contract itself is described on participating whole life insurance, and the test on the exempt test.

The honest costs of applying

Underwriting has real costs, and they are worth weighing before you sign.

• Privacy. You give a stranger your medical history, blood and urine, access to your doctor's notes, and details of your income and savings.
• Time. A file can take weeks or longer, and the new policy does not cover you in the meantime unless a temporary agreement applies.
• A record. The insurer keeps its own file, and later applications may ask about the decision.
• Unwelcome news. Some applicants learn about a condition through their results. Once a diagnosis exists, later applications may ask about it. Genetic test results stay protected by the federal Act.
• Possibly nothing. After the forms and the appointments, the answer can be no.
• A claim at risk if the form is wrong. The people who face that are the beneficiaries, at the worst moment, with no one left to explain what was meant.

When the timing may not suit you. A fully underwritten application may be the wrong step right now if you are in the middle of medical tests with no result yet, or if you need coverage in place within days. In the first case, the insurer may simply postpone the file, and waiting for the result can be the wiser move. In the second, ask about accelerated or simplified options and compare their limits and their price.

Before you apply: a checklist

• The name, address and phone number of every doctor and clinic you have seen in the period the application asks about.
• Each medication, its dose and the reason it was prescribed.
• The dates of tests, surgeries, hospital stays and specialist visits.
• Your travel plans, your occupation and any hazardous sports or activities.
• For larger amounts, recent tax returns or financial statements, and the purpose of the coverage.
• Your existing coverage, including group coverage at work, and any pending applications.
• A copy of everything you sign, including any declarations at delivery.

The contract this process issues, and the mechanics it runs on, are set out across policy basics.