How does disability insurance underwriting work?

Disability insurance protects your greatest asset — your paycheck. If you temporarily or permanently lose the ability to earn due to illness or injury, disability benefits can help you maintain your lifestyle.  

Important as disability insurance is, not everyone who applies may get it. Insurance companies evaluate the risk profile of each applicant through a process called underwriting, and based on their findings, determine whether to offer a policy or not.

Disability underwriting occurs for both short-term disability insurance and long-term disability insurance so it is important to know the process.

What is Underwriting?

Underwriting is the process that financial institutions follow to assess a risk before taking it. Lots of things go through underwriting — an auto loan, a mortgage, and, of course, disability insurance. When you apply for disability coverage, an underwriter — a person specializing in assessing risk — evaluates your application.  

Underwriters assess the level of risk you represent to the insurer. Based on their findings, the underwriter decides whether to extend coverage to you or not, and how much premium to charge. The lower your risk of disability, the greater the chance of securing the desired coverage at low rates.  

What is Disability Income Underwriting?  

Disability underwriting is the process followed by insurance companies to assess and evaluate applicants to determine their insurability and premium rates. Specifically speaking, the underwriters decide your likelihood of becoming disabled.  

To find this out, the underwriters look at your health, age, gender, medical history, occupation, and hobbies. They also take your income into account, since the size of the payout is based on your income. Typically, disability benefits are anywhere between 50% and 85% of your pre-disability income.  

What is Involved in Disability Insurance Underwriting?

As part of the application process, the insurance company will ask you to answer a few simple health-related questions. You will also most likely have to take a medical examination similar to an annual physical. Some disability insurance policies allow you to skip the medical examination, but they are generally costlier. The paramedical examination is free to you, does not take more than 20-30 minutes, and can be scheduled at your convenience. So, there is no reason not to take it.  

The disability insurance application will include questions related to your current health and medical history. The insurer will also want to know your lifestyle habits, like smoking, recreational drug use, drinking, and exercise. Additionally, you will have to disclose your hobbies and the nature of your work.  

In the medical test, a paramedic will take your height, weight, blood pressure, and pulse measurements and collect urine and blood samples.

Examples of health conditions underwriters look for during the paramedical examination include:  

• high blood pressure
• diabetes

• high cholesterol
• recurring injuries
• HIV/AIDS
• conditions relating to tobacco or drug use.

Underwriters will check if your test results match with the information provided by you on the application form. If there is a mismatch, you will likely pay more or may even be denied coverage.  

It is important to answer all questions on the form truthfully. All disability insurance plans include a contestability period, usually two years. If you file a claim during this period, the insurer can reject it if it finds you guilty of material misrepresentation.  

Any omission or concealment of facts or incorrect statements that would have impacted the insurer’s decision to write you a policy is considered material misrepresentation. For example, if you have arthritis and did not disclose it, that is material misrepresentation. Had the insurer known this fact, it probably would have refused you coverage or approved you at a higher rate or with an exclusion. Exclusion means the insurance company will not issue benefits for illness or injury related to an excluded activity or health condition.  

Basic Eligibility Requirements for Disability Insurance

Disability insurance has certain basic eligibility requirements.

These may vary from one insurance provider to another, but they generally include the following:  

• You must be aged between 18 and 60.

• You must be a resident in Canada for more than 12 months.
• You must be working full-time for at least ten months (Some insurance carriers offer limited coverage to those working part-time).
• Your annual salary must be at least $15,000.
• If you apply for coverage during the first year of employment, you may have to submit a copy of your employment letter.

How Does Disability Insurance Underwriting Work?

Disability insurance underwriting has three parts: medical, occupational, and health. What you do for living and the nature of your job greatly impacts your overall classification. A dangerous occupation can increase the cost of insurance or limit the coverage. The entire underwriting process usually takes up to six weeks, but the timeline may vary from provider to provider.  

Your Occupation

Your job strongly impacts your insurability and premium rate. Some occupations carry a higher risk of injury than others. For example, a teacher is less likely to suffer a hand injury at work than a construction worker.  

Not only are some workers more likely to become disabled, but a disability may keep them out of work for a longer period. A hand injury may prevent a teacher from working for only a few days, but the same injury can put a construction worker out of work for a few weeks.  

When you apply for disability coverage, the insurer will assign you an occupation class based on the duties of your job. Most insurers will assign you one of the following five occupation classes: B, A, 2A, 3A, and 4A. The chances of becoming disabled decreases from B to 4A.  

The highest risk class, 4A, is usually assigned to professionals, medical specialists, and executives. Whereas the B class is generally reserved for extremely physically demanding jobs, like stonemasons, construction labourers, and roofers. People who are assigned the B occupation class will pay more for coverage than class 4A applicants, all else being equal.  

Different insurers may classify your occupation differently, but they usually consider the following:  

• Job Duties: The underwriter will take into account your day-to-day job duties while evaluating your risk profile. The senior manager of a construction company is less risky to insure than someone directly involved in construction work.  
• Employment history: How long you have been employed and your annual salary can influence your occupational rating. A marketing manager will receive a better rating than, say, a sales representative.  
• Occupation claim history: Certain sectors, like construction, fishing, and manufacturing, have higher incidents of disability than others. If you are employed in a high-risk industry, expect to receive higher premiums.  

Some occupations are fairly easy to classify. For example, assigning the appropriate occupation class for jobs such as accountants, dentists, massage therapists, and construction workers is straightforward.  

However, in certain situations, things are not clearly distinguishable. It would be much harder to assign an appropriate occupation class to a business owner who performs various roles for his company — accounting, sales, manual tasks, marketing, and more. Keep in mind that underwriters are more concerned with the specific job duties you perform on day-to-day basis than with your job title.  

Your original occupation class is not always set in stone. Some classes are eligible for an upgrade if certain conditions are met. For example, if you were rated 2A at the time of applying, the insurer may bump you up to 3A once you gain a few more years of work experience and meet a certain income threshold. The upgraded class will reduce the cost of insurance, so it is worth checking with the provider if you can be considered for an upgrade.  

Your Income

Since the purpose of disability insurance it to protect your income, it involves financial underwriting. The underwriter will look at your financial details to ensure you are not over-insuring yourself — buying more coverage than you would need to maintain your lifestyle in the event of disability.  

If you ask for a coverage amount that is too much for you, the insurer will ask you to reconsider. The aim of disability benefits is to protect your lifestyle — not discourage you from resuming work.  

Generally speaking, disability benefits replace 50% to 80% of your pre-disability income. If you earn $240,000 a year, you can receive up to $192,000 in disability benefits.  

When you apply for disability coverage, the insurance carrier will ask you to submit a proof of income document. The maximum coverage you are eligible for will depend on your annual income.  

Your health, medical history, and hobbies

Insurance carriers consider your current health, medical history, and hobbies to determine the likelihood of your filing a disability claim. They will look at things such as:  

Age

The cost of disability insurance goes up with age. That is because older people are more likely to develop a serious illness or become injured than younger applicants.  

Gender

Disability insurance is costlier for women than men. That is partly because women file more disability claims than men and partly because their claims tend to be more expensive. If you are a woman, expect to pay up to 40% higher premiums than men of the same age and risk profile.  

Health

The healthier you are, the lower the premium rate. Certain health conditions, like diabetes, can increase your rate, as can habits like smoking.  

Pre-existing Conditions

Insurance company may refuse to write you a policy or add an exclusion if you have certain pre-existing conditions, for example, cancer.

Hobbies

If you like to participate in dangerous activities, like scuba diving or bungee jumping, you will pay a higher premium than someone who does not, or you will receive a policy with an exclusion.  

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Other Factors that Impact Your Disability Premium

Apart from your occupation, coverage amount, and personal details, there are several other factors that can impact how much you pay for disability coverage, even though these are not a part of the underwriting process.

These include:  

• Waiting Period: Generally, all disability insurance policies include a waiting period, also known as the elimination period. It is a small period — usually 90 to 120 days — that you must wait following a disability before you can collect the benefit payments. The shorter the waiting period, the higher the premium amount.  

• Benefit Period: The length of time your policy pays benefits also impacts the pricing. The longer the benefit period (some insurers call it the payout period), the greater the cost.  

• The Definition of Disability: Insurance carriers define disability as either own-occupation or any-occupation. The own-occupation definition is the broader of the two and hence these policies are more affordable. With own-occupation disability insurance, you receive benefits if an injury or illness prevents you from performing the main tasks of your occupation. In contrast, any-occupation disability insurance pays benefits only when you cannot perform the substantial duties of any occupation for which you are reasonably qualified.  

• Riders: Riders are optional benefits that you can add to your disability policy for a small fee to customize it according to your needs. Common disability insurance riders include the future increase rider, cost of living adjustment (COLA) rider, and basic partial disability rider. The more riders you add, the higher the monthly premium.

What is Simplified Disability Insurance?

A simplified disability insurance policy is a disability policy that does not require taking a medical examination as part of the underwriting process. Instead of relying on both the results of your paramedical test and information provided by you to determine your premium rate, the insurer only uses the latter.  

If you have a serious health condition, a simplified disability plan can be your only option to buy disability coverage. Since your eligibility largely depends on your age and occupation, you can get approved even with a pre-existing condition.

Simplified disability insurance can also be a good choice for people who are afraid of needles, are too busy to take a medical examination, or want to speed up the application process. Simplified disability policies usually take only a few days for approval. In contrast, fully-underwritten plans can take up to four to six weeks.  

The tradeoff, however, is that these policies are generally more expensive. Also, these policies may be available only to certain age groups and have smaller coverage amounts, although this depends on the insurance provider.  

What Happens Once the Underwriting Process is Complete?

Once the insurer completes the underwriting process, they will inform you about their decision. Any of the following three scenarios will play out:  

1. Your application will be approved as it is

If your application and medical tests do not reveal any red flags, the insurer is likely to approve coverage without any changes. Your premium will remain the same as initially quoted.  

2. You are approved with certain changes to the policy

If the underwriter rates you as high risk, you may be approved but with certain changes.

These changes may include:  

Exclusions

Insurance companies use this tool to deal with dangerous activities and/or health conditions. Exclusion means that the policy will not pay benefits if you become disabled while doing a certain activity or injure a certain part of the body. For example, your policy may not pay benefits if you are injured while scuba diving.

Higher premiums  

If there is a mismatch between the information provided on the form and the results of your medical examination, the insurer may approve you but at a higher rate than originally quoted. For instance, if your test results show that you have a high blood sugar level, something of which you were not aware, you may have to pay more for coverage.  

Longer waiting period or shorter payout period

Disability benefits do not start immediately if you become disabled. Instead, they commence after a certain period, known as the waiting period. If you have a health condition, like asthma, that puts you at a greater risk of short-term disability, the insurance carrier may extend the waiting period to 90 or 120 days. In some cases, the insurer may reduce the payout period instead.  

Smaller payout

If you have a health condition, receive a low occupation class, or have applied for more coverage than you reasonably need, the insurer may decide to reduce the disability benefit.

3. Your application is rejected

If the insurer finds you too risky to insure, they will reject your application. You will receive a letter detailing the reason for denial. Most applications are rejected because of health reasons. You can request the insurer to reconsider their decision, but doing so makes sense only when you are sure they have made a mistake.  

If you are refused insurance once, that does not mean it is the end of the road for you. Different providers underwrite policies differently, and there are some that specialize in high-risk applications. Speak to a Dundas Life expert to find out insurers that may be willing to write you a disability insurance policy.  

If you just cannot obtain a fully underwritten disability policy, consider a simplified disability insurance policy. While these plans are a little expensive, having peace of mind that you will be able to maintain your lifestyle if you lose the ability to work may be worth the extra cost.

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Conclusion

Disability insurance underwriting is a detailed process an insurer follows to measure your risk of becoming disabled. The insurer looks at a number of things, including your occupation, income, age and health, to determine your insurability and set your premium rate. The entire process can take up to six weeks, but an independent broker like Dundas Life can help guide you through it.  

Frequently Asked Questions

• What factors impact disability insurance underwriting?

The main factors that impact your insurability and premium rate include your occupation, age, health, gender, income, and hobbies.  

• How long does disability insurance underwriting take?

Generally, the disability insurance underwriting process takes four to six weeks to complete. However, if the insurer needs access to your medical records, you may have to wait a little longer.  

• Can I get disability insurance with a chronic health problem?

In most cases, the answer is yes. If you have a chronic health condition, you will likely pay a higher premium than someone in good health or receive a policy with exclusion. Even if your health condition is severe enough to disqualify you from fully-underwritten disability insurance altogether, you may still be able to take out a simplified issue policy. Since these policies do not involve a medical examination, you can receive approval despite poor health, as long as you meet the age criteria.  

• How does disability insurance underwriting work?

Disability insurance underwriting comprises three parts: occupational, medical, and financial. What you do for living has a big impact on your final rating, with more dangerous jobs linked to higher premiums. The entire underwriting process usually takes four to six weeks.