What Health Insurance Companies Look For in Your Application

Health insurance companies make their money over the long run by rejecting applicants who are likely to have large medical expenses that will cost more than those people will ever pay in premiums. Conversely, insurance companies want to accept applications from people whose medical expenses are likely to be average or below average. Think about health insurance from the perspective of a carrier—unlike your employer, a health insurance carrier is a privately owned company with whom you have no relationship. When you apply for an individual/family policy you are asking a third party to take an amazing risk on your continued good health.

If a carrier accepts you for, say, a policy costing $300 a month, it will probably receive about $9,000 in premiums from you over the 30-month average life of an individual/family policy—and pay out about $2,500 in claims for a healthy family during this same 30-month period ($1,000 a year). The carrier will also have to pay a commission of typically 6 to 20 percent on the first-year premium if you were represented by a health insurance agent. The gross profit per policy in this case is about $6,100 ($9,000 premium – $2,500 claims – $400 commission = $6,100).

If you or a member of your family develops a problem with your health, you are probably going to keep your policy for a lot longer than 30 months—since you won’t be able to get a job while you are ill or get cheaper health insurance anywhere else while you have a preexisting condition. Your treatment might cost $10,000, $50,000 or even $100,000 for each year you keep the policy until you hit the lifetime maximum of $1 to $5 million. Insurance companies will go bankrupt if they accept too many people with preexisting conditions who are likely to cost the company far more than they pay in premiums.

It is also very important that your application be complete and accurate before it goes to the underwriter for review. In this example, the carrier makes a gross profit of $6,100 if your family stays healthy; conversely, it potentially loses from $1 million to $5 million when it insures someone whose health deteriorates or who has an accident. The carrier has to sell 820 policies to healthy families to cover the cost of one family who hits a lifetime max of $5 million (820 × $6,100 = $5 million). The general rule of thumb when it comes to underwriting health insurance applications is “when in doubt throw it out”—meaning the underwriter will not consider an application with incomplete or confusing information.