Premium Calculation
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Premium Calculation

Premium Calculation. Purchasing insurance products can be very confusing. And sometimes this makes people believe that insurance companies are out to get them.

You see, buying insurance is unlike any other kind of purchase. First, you are given a quote, then you must complete an extensive application — that's when the underwriting process begins. After that, the insurance company presents a policy offer, and sometimes, the final price may be different than your quoted price.

So we're going to take a few minutes and solve this puzzling topic.

Now, the initial quote that you receive is called a qualified estimate. How close the quote actually is to reality is based on the thoroughness of the questionnaire and how accurately your answers are profiled.

Say you go to an on-line service to obtain a life insurance quote, and the only questions you are asked concern your age, gender, tobacco status and the type of coverage you want. Believe me, the quote that you get will not be at all close.

But if you go to a good service, you'll answer questions about your medical conditions, family history, blood pressure, cholesterol levels, height/weight ratios, as well as the amount and type of insurance you want. Here, your initial quote will be much closer to the final premium.

Which leads us to how the final premium is calculated.

Okay, let's say that you are applying for a life insurance policy. When the underwriter has received your application, you will be required to undergo a brief medical exam. The underwriter then looks for any abnormalities, such as elevated cholesterol, liver enzymes, protein levels, and so-forth. And your driving record will be reviewed for excessive moving violations. Then the underwriter will use this information and the data on your application to determine a rate classification. By the way, with health insurance, the underwriter usually does not require a medical exam, but will rely on medical records.

If you fit in a healthy classification, you will receive a Preferred rating. But say your cholesterol is above 210 — the limit set for Preferred — then your rating could go up an additional five-percent, but still be classified as Preferred. Or for health insurance, you may end up with a Standard rating.

Sound complicated? It is. So to minimize the process, you should ask if your selling entity has its own in-house case management department. Why? A company that contain its own back-office can accelerate the process by obtaining all outstanding requirements and actually negotiate a better rate classification if it's warranted. Most on-line services simply pass the application on to the insurance company, resulting in a higher premium and possibly delaying the underwriting process.

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