A basic principle is that insurance should compensate for a loss but not enrich the beneficiary. Over-insurance, however, increases the moral hazard risk. For example, if an insurance policy fully replaces someone's pre-disability income, the insured may have no incentive to return to work. Therefore, for financial underwriting the potential loss in the event of a claim always needs to be considered.

This is complicated by the fact that there is an asymmetry of information between the applicant and the insurer. The applicant knows their financial situation, but they can easily withhold necessary information or present it in a more favourable way, (e.g. declare a higher income), which can result in anti-selection. For this reason, it is important to have the appropriate questions in the application and financial questionnaire. For higher sums insured, additional supporting financial evidence from independent third parties should be obtained.