What Is Substandard Risk in Life Insurance?
Understand how life insurance companies assess unique risk factors and their effect on policy terms.
Life insurance offers financial protection to beneficiaries upon the insured’s passing, providing a crucial safety net. Insurers undertake a thorough risk assessment process to determine the likelihood of paying out a claim. This evaluation helps them price policies appropriately, reflecting the individual risk an applicant presents. Not all applicants are viewed uniformly, as various personal factors influence this assessment.
Defining Substandard Risk
Substandard risk in life insurance refers to individuals who present a higher probability of an early claim compared to an average, healthy applicant. Life insurance companies categorize applicants into different risk classes, ranging from preferred plus, preferred, standard, and substandard, to sometimes uninsurable.
The standard risk class represents individuals with average health and life expectancy within their age and gender group. Applicants healthier than average may qualify for preferred classes, which offer better pricing. Conversely, those classified as substandard fall outside the standard risk profile due to factors that elevate their likelihood of premature death. This classification directly impacts the terms and cost of their life insurance coverage.
Factors Influencing Classification
Numerous factors contribute to an applicant being classified as substandard, each increasing the perceived risk to the insurer. Health conditions are a primary consideration, with chronic illnesses like diabetes, heart disease, or a history of cancer significantly affecting classification. Insurers also examine an applicant’s height and weight ratio, as obesity can lead to higher risk ratings due to associated health complications.
Lifestyle choices also play a significant role in risk assessment. Habits such as smoking, using other tobacco products, or excessive alcohol consumption are risk factors due to their known impact on health and life expectancy. Engaging in high-risk hobbies like skydiving, scuba diving, or auto racing also increases the risk profile, as these activities carry an elevated chance of injury or death. Occupations involving hazardous duties, such as those in construction, mining, or certain aviation roles, can also lead to a substandard classification due to the increased likelihood of workplace accidents.
Impact on Policies
A substandard risk classification directly translates into higher premiums for life insurance policies. Insurers implement various methods to adjust costs, reflecting the increased likelihood of a payout. One common method is the application of “table ratings,” which involve adding a percentage to the standard premium. Table ratings are expressed as letters (e.g., A to P) or numbers (e.g., 1 to 16). For instance, a Table 2 rating might mean a 50% increase over the standard premium, while a Table 4 rating could signify a 100% increase.
Another adjustment mechanism is a “flat extra” charge, which is an additional dollar amount added per $1,000 of coverage. This flat extra can be temporary, lasting for a few years, or permanent, depending on the nature of the risk. For example, a flat extra of $5.00 per $1,000 of coverage on a $500,000 policy would add an extra $2,500 annually to the base premium. Flat extra charges apply for specific risky activities or during recovery periods from major health issues. While substandard classifications mean higher costs, they still offer individuals the opportunity to secure coverage.