Insurance is based on a simple concept—a group of people can collectively bear the costs of unexpected events that are too great for any one member of the group to handle alone. But how is this group organized? How is each individual's contribution to the group determined? And how do you fit into this picture?

Risk appraisal is the mechanism insurance companies use to answer these questions. It is a critical part of the application process. This section will help you better understand risk appraisal by explaining the process and why it's important to you, and to Northwestern Mutual.

The ultimate goal of risk appraisal is to fairly evaluate each person so that those with equal appraisals pay the same for their insurance coverage. Charging everyone the same price for their insurance, regardless of the results of their risk appraisal, would be unfair.

Risk appraisal allows insurance companies to organize their pool of policyowners into groups based on their risk appraisal results.

Policyowners with similar appraisals are placed in the same group and share equally in the risks and rewards that define their group—they pay the same price for insurance. Our goal is to avoid having one group of policyowners subsidize another group with a higher level of risk.

Risk appraisal is the process an insurance company uses to determine how to best issue a policy to you, and, if it can, at what price (premium) and under what terms.

The risk appraisal process:

• Determines your risk profile based on medical and financial factors, and personal attributes (for example, your driving record).

• Determines whether or not the company can issue a policy to you based on your risk profile.

• Places you into a group of people with similar risk profiles.

• Determines the premium and contract terms necessary for members of your group.

• Protects you as an existing customer in that the value of your insurance will not be compromised by issuing policies to people with unfavorable risk profiles.

Once your risk profile is established and you are eligible for a policy, you are placed in a group of people with similar risk levels, and charged the appropriate premium to cover the risk factors associated with members of that group.

How much you pay for your insurance depends on how your level of risk fits with other potential and existing policyowners. The lower your risk, the less you pay. The higher your risk, the more you pay.

Therefore, risk appraisal helps to ensure that you pay only what is appropriate to insure an individual with your health characteristics and risk factors.