- Nirmal Kumar Lamichhane
Financial underwriting in a life insurance policy is the process of evaluating the justification of the financial status of the insured who wants to do the policy. In which it is decided whether the proposed sum assured is suitable based on the income, assets, liabilities and insurance needs of the insured. Since insurance is the process of determining the risk by evaluating the proposal, it is a financial arrangement to minimize the risk from uncertain events that may occur in the future (not the investigation of full damage), if the insured person does not have income or if the insured person does not have income or insurance is insured much larger than the income, then it has no financial justification and the insured’s right to live independently by being developed as a tool to earn insurance wealth can also be violated and such insurance may have a vested interest of the nominee. it can.
Main objectives
- The sum assured needs to match the actual financial capacity of the insured person. If someone insures more than their income, it may be unfair.
- Confirming the need for insurance to evaluate whether the policy covers real economic risk.
- Risk reduction of excessive insurance.
- Reducing the likelihood of insurance fraud.
- Promoting the principle of insuring on the basis of income.
- Meeting the insured’s actual income.
- The purpose of taking insurance is financial risk management or an attempt to gain financial benefits?
- may sometimes be used to abuse the policy. Especially if people from lower economic backgrounds offer unusually large insurance policies.
- Low-income individuals offering excessive insurance are likely to pose moral risks such as insurance abuse, suicide or murder. Financial underwriting helps mitigate such risks.
Major bases of evaluation
The key bases of financial evaluation for life insurance can be the following. The suitability of the policy can be determined using these grounds. So that the sum assured is balanced with the applicant’s income, assets and liabilities.
Annual income
- is assessed as the total annual income of the insured.
- The maximum limit of insurance amount is determined based on this.
- The sum insured usually ranges from 10 to 15 times the annual income (varies by age).
Usage : If a person’s annual income is Rs. If he has Rs 1.2 million, he can get up to 10 times insurance (Rs 1.2 crore) financially justified. So, Rs. While offering insurance of Rs 5 crore, the financial underwriter will ask why it is suitable on the basis of so much income, liability or assets.
Type of profession or occupation
- The applicant’s career, business or job is assessed based on stability and level of risk.
- People in temporary or risky occupations may be provided with limited sum insured only.
Assets and liabilities
Details of bank money, real estate, investment (e.g. shares, debentures, mutual funds) etc. are looked at.
Loans and liabilities on the applicant are also evaluated.
Purpose of insurance requirement
Why is insurance going to be done?
- Personal security
- Family security
- Repayment of debt
- Part of the tax plan
- Protection of business partners
- Part of the property plan
Previous insurance history
- How much insurance has been taken before?
- Current insurance plans are reported.
- The total sum insured is checked not to be excessive.
Age and life stage
- Youth, adults, or older adults have different insurance requirements at each stage.
- Example: While a young person does not need more insurance, a person with family liability may take more insurance.
Financial statement proofs
The following documents may be required:
- Salary and tax returns
- Bank statement
- Business registration certificate
- Audit report
- House rent amount or house rent agreement
- Investment in income from other investments such as share debentures, etc.
Areas of special attention
- Based on income estimates of people going for foreign employment.
- Underwriting based on Spouse’s income when insuring housewives or non-income groups.
- Underwriting based on balance sheet, tax returns, bank statements, etc. for business owners.
Sources of income for underwriting life insurance may be:
- Salary, business, agricultural income, etc.
- Income statement proof (income tax return, bank statement, salary, etc.)
- Total assets (land, house, bank stock)
- debt burden
- Details of previous policies
- Underwriting can also be done based on the income of the spouse, but the risk is high.
Conclusion
Financial underwriting is an essential process not only for the safety of the insurance company but also for the benefit of the insured. The main reasons for life insurance lapses and surrenders are related to lack of financial, psychological information. Since both these conditions affect both the insured and the insurer, it is important for both the insurance company and the insured to pay attention to financial underwriting.
Lamichhane is the head of law and claims department of Reliable Nepal Life Insurance. )
