SECTION VIII - Life Insurance Underwriting
Underwriting is the process of selection and classification of risks. The process consists of evaluating information and resources to determine if the client will be accepted or rejected and how an individual will be classified (standard or substandard). Once this part of the underwriting procedure is complete, the policy will be rated and the premium which the applicant will pay will be determined. The policy will then be issued and subsequently delivered by the agent.

An underwriter's job is to use information gathered from many sources to determine whether or not to accept a particular applicant. An underwriter will also consider perceived hazards which may appear to be present.

Acceptable applicants should be placed in the correct underwriting class and pay an appropriate premium that reflects the exposure for that class.

Life insurance underwriting is based, in part, on the basic principle of emphasizing the standard acceptable group, so that most applicants are accepted at standard rates. A large number of rejections increases the insurer's cost of doing business, erodes the morale of the sales force, and may also lead to a loss of goodwill among the buying public.

Important underwriting factors for individual life insurance include age, sex, build, physical condition, personal and family health history, smoking habits, involvement in hazardous sports or hobbies, personal habits and morals, country of residence, and occupation.

In addition to the individual pieces of information received, an underwriter must frequently exercise judgment based on his or her years of experience in order to form an overall opinion about the nature of a particular risk. An underwriter might decide to reclassify or reject a risk, or maybe simply take a closer look by ordering an investigative report, requesting a medical examination, or checking some of the facts a second time.

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Summary
Income Tax Consequences

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Proceeds Proceeds may be subject to Estate Taxes depending upon who owns the policy and who is the beneficiary. Lump Sum
Installments No Income tax;

Interest portion taxable as income. Cash

Surrender Value Cost Recovery Rule (portion in excess of premium as income). Premium

Payments Individual: Not dedcutible.

Group paid by employer: Cost for the first $50,000 of life insurance is dedcutible for employer; and the cost for coverage in excess of $50,000 is taxable as income to the employee.