Risk appraisal is a simple concept used by life insurance companies to assess a fair premium cost for people who purchase their products.
Life insurance is based on a rather uncomplicated premise.
It is easier for a group of people to share the cost of an unexpected death than for a single individual to bear the inevitable burden.
The intent here is to fairly evaluate each individual so that all persons in similar situations fall in the same category and as a result pay the same premiums for life insurance.
Had insurance companies not done this everyone would pay the same and that would be unfair.
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Insurance companies therefore create criteria which would organize their policy owners in groups based on the results, after obtaining information regarding each applicant.
Policy owners with similar evaluation results are placed in the same category and equally in the risks and rewards of that group.
The intent here is to avoid having one group of policy owners subsidize a group that would be a greater risk. The insurance company, through the process of risk appraisal therefore determines how to best issue a policy(under what terms) and at what price.
The insurance company determines what group an individual should be placed in based on medical history as well as physical condition at the time of application for the policy, personal attributes such as whether or not you smoke, drink excessively, use drugs not prescribed by a physician, driving record or involvement in any hazardous activity.
Risk appraisal helps the life insurance company determine whether the amount of insurance applied for is justified by the applicants financial situation. They want to know your annual income, personal and business.
If large amounts of insurance are requested they may want to see a personal balance sheet(assets and liabilities) or a financial statement.
An inspection report may be conducted, only with your approval, and you may be asked for references if the policy applied for is very large or if there is anything is uncovered which indicates that the company needs additional information.
All these seemingly unimportant things help the insurance companies actuaries arrive at a fair premium for the client. Any information acquired by the insurance company is deemed confidential and is treated as such.
Through risk appraisal all these things are taken into consideration and an applicant is put into a group based on these criteria, and if a policy can be issued and an appropriate premium is then determined.
The lower the risk the lower the premium charged, the higher the risk the higher the premium charged.
Risk Appraisal Criteria
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