The first thing, probably the most important thing, an insurance company have to do in underwriting process is determining the insurance risk profile. Insurance companies make "groups" or categorize individuals that have similar characteristics. These groups or category will be used to determine the risk when the company writing a new policy and determine the premium that will be charged for insured's coverage. It is true that no individuals are having exact same characteristics, but some people showing similarities in particular category. This is not apply only to individuals or person but also companies or business venture. Why the insurance company need to categorize their applicant? The reason is company's profit, underwriting new policy determine company's profit. If the company make a right calculation, they can gain profit from the policyholder's premium. Even if insured file a claim, it won't hurt the company's financial state. However, it is not good idea in taking several hundred dollars a year as premium but the policyholder end up creating thousand of dollars in claims because insurance company make miscalculation. 

I take auto insurance as example because the case is common and the risk class is easier to classified than any other insurance. As explained in previous article, insurance company use several measurement in examine their applicants. The age of the vehicle, driver's age, history of driver, the amount of coverage requested and the area that the vehicle operated are the basic information they need. These information will create a profile of driver's type which can determine how the drivers act on the road. This actuarial analysis can determine actual risk of the drivers might have. The amount of coverage needed and how much the coverage should cost also are determined by the insurance risk profile. Insurance company then make risk classes for individuals and companies with the similar characteristics. The risk classes are preferred, standard and substandard.  

Many Insurance companies will combine their premium earnings by balancing the low premiums (which means low revenue) with policyholder which have bigger premiums (most likely preferred risk classes) associated with more risky drivers. They take this measurement to limit the risk between 

policies' portfolio and the amount of premiums from all the policies they bring in. 

Standard auto insurance means that auto insurance company considered the drivers to fall into an average risk profile. The company charged the premium based on actuarial information compiled from similar drivers in the past. Insurance company need to be able to estimate the risk in underwriting new policy, or else it can break or make the company. It can be profitable or they can wind up paying out more benefits that receiving premiums if they do not understand the risk effectively. 

Insurance companies, in this case auto insurance, will consider driver's age, driving record, car usage, credit history, and location. They also will compare the driver's characteristics with actuarial information. The actuarial information helps the insurance company to determine the time frame of the driver "will getting into an accident". The company use this information to set the premium that charged to the insurer as well. That's why insurance company have to fully understand and pay close attention to individuals and business when underwriting a new policy.

There are three categories the insurers use to divide the drivers: preferred, standard, and substandard. Preferred is usually the least risky drivers based on their driving history and vehicle usage characteristic, so that the drivers offered the lower premium. Standard drivers are average in term of risk and get regular premium. The most risky is substandard; they are either pay highest premium or denied in getting coverage.

Standard drivers do not mean they have perfect driving record. They are most likely have long driving experience, good credit history, do not own sports car and use their vehicle for commuting short distance (relatively).

Unlike life insurance, permanent life insurance do not have expired time and also combine death benefit with savings portion. It accumulates a cash value, the policy owner can withdrawing money, borrowing cash value or cancelling the policy and receive the surrender value. The insurer usually apply waiting period after policy purchase to accumulate sufficient cash value when insured want to borrow saving portions of the permanent insurance. Permanent life insurance policy holder get tax-deferred benefit which means they won't pay taxes on any earnings in the policy as long as the policy still active. Policy loans generally are not considered as a taxable income. Permanent insurance have three basic types: whole life, universal life and endowment.

Whole Life

Whole life is a life insurance policy which is guaranteed to remain in force for the insured's entire lifetime, provided required premiums are paid, or to the maturity date. Since whole life policies are guaranteed to remain in force, the premiums usually much higher than those life insurance where the premium is fixed only for a limited term. The premiums are fixed, based on age of issue and do not increase with age. 

Whole life insurance have both pros and cons depends on each individuals. People think that whole life insurance is worthwhile due to indeterminate length of time and also including funeral expenses, estate planning, surviving spouse income and supplemental retirement income as the benefits. On 

the other side, people think whole life insurance is too expensive because of relatively high premiums, making them having large debts. Families with large needs and limited income also find this whole life insurance very expensive. 

Universal Life

Universal life insurance combine permanent insurance coverage with premium payment flexibility and potential cash value. Interest-sensitive (traditional fixed universal life insurance), variable universal life, guaranteed death benefit, and equity-indexed universal life insurance are several type of universal life insurance policies. It also have cash values, both premium and death benefit are flexible. 

Flexible death benefit means the insured can choose to decrease or increasing the death benefit. Increasing require new underwriting. Another feature is the ability to choose option A or option B. Option A referred to level death benefit; death benefits remain level for the life of the insured and premiums are lower. Option B is the insured pay the policy's cash value; a face amount plus earnings or interest. The cash value growth give impact to the death benefits. Option B have higher premium than option A. 

Endowment

Endowment policy is a life insurance contract designed to pay a lump sum after a specific term (maturity) or on death. Endowment life insurance policy often dressed up as a college savings plan. Typical maturities are ten, fifteen, twenty years or up to certain age limit. After certain monthly contributions, you are guaranteed a certain endowment (payout) when the policy mature. If the policy owners die before the policy mature, the beneficiaries will receive death benefit and will have the anticipated money.