The terms “underwriting” and “risk class” might have come up if you’ve considered applying for life insurance. Those phrases might undoubtedly sound daunting, especially if they give you the impression that your life’s risks will be scrutinized.
Do not be concerned; life insurance firms do not require a complete profile of you. To decide whether to offer you coverage and how much to charge, they do need to know how much of a risk you are to insure. For this reason, they employ a procedure called underwriting. Based on the data acquired throughout the underwriting process, they will assign you to a particular risk class.
Neal Kerins, vice president of insurance product development at John Hancock, explains that the underwriting approach “is designed to deliver the most-fair price for a customer’s risk profile.” The idea is to strike a balance between affordability and providing insurance to as many individuals as possible.
Before requesting coverage, it’s critical to comprehend this framework and the numerous risk classes that insurers utilize. You’ll then understand more about how your life insurance rate is determined.
How the Life Insurance Underwriting Process Works
The underwriting process involves gathering a lot of information about you, starting with an application that asks about your age, medical history and mental health, family medical history, occupation and even hobbies.
In many cases, the life insurance company also will get your medical records from your doctors, your prescription drug history, your driving record and other records to verify your identity and other risk factors. A “fully underwritten” policy is one that takes into account all this medical and personal information. An application may also require a life insurance medical exam. (You might be able to skip the exam if your insurer is using “accelerated underwriting.”)
During the exam, your height, weight, pulse and blood pressure will be checked. Blood and urine samples will be collected. And an EKG might be required if you’re 50 or older or applying for a policy with a death benefit in the millions of dollars.
Information gathered during underwriting is then used to determine in which risk class you belong. Your risk class will then be used—along with your age and gender—to determine the rate you pay for insurance.
Understand the Life Insurance Risk Classes
Super preferred, preferred, and standard are the three risk classes most frequently used by insurance firms. Although the standards for each class vary slightly from firm to organization, the particular requirements can. Applicants may be labeled as substandard if they don’t meet the requirements for these classes.
Super Preferred Risk Class
Someone who qualifies for the super preferred—sometimes called preferred plus—class is in excellent overall health, doesn’t engage in risky hobbies or have a dangerous occupation, Kerins says. You can’t have a history of tobacco use in the past five years or drug or alcohol abuse in the past 10 years. You can’t have a history of cancer or heart disease. And, for the most part, you can’t have a parent who died from cancer or cardiovascular disease before age 60 or possibly 65.
Only a small percentage of applicants qualify for super preferred, says Todd Balderson, founder and CEO of Balderson Insurance Agency in Maryland. “You’ve got to be hitting all the numbers—no traffic tickets, no DUI, textbook blood pressure and cholesterol,” he says.
Preferred Risk Class
The profile of someone who meets the requirements for the preferred risk class is comparable to that of someone in super preferred. However, Kerins notes that they might be on medicine to manage a condition like high blood pressure, be a little overweight, or have a family history that suggests risk.
Diabetes sufferers, as well as people with some well-managed mental health issues like anxiety and depression, may be eligible for the preferred class provided their conditions are well-managed. When someone is taking medication, Kerins adds, “that’s a good thing because you’re addressing the illness.”
Standard Risk Class
Most people fall into this class. Someone in the standard class typically tends to have a higher body mass index (BMI), is taking multiple medications or has potential health issues, Kerins says. Your driving record doesn’t have to be perfect, and some risky occupations such as aviation are acceptable. The standard risk classification also is more lenient when it comes to smoking. Typically, you must be tobacco-free for a year (rather than five years). However, you might qualify for the standard class if you are a marijuana user—depending on the insurer.
Substandard Table Rating
Insurers use a table rating system of letters or numbers to classify policyholders who are considered substandard. This rating system is used for those who have significant health conditions or only a short track record of managing a health condition, Kerins says. Conditions that can trigger a table rating include past alcohol abuse or treatment, severe asthma, bi-polar disorder, epilepsy, multiple sclerosis and Type 1 diabetes.
While many people with medical conditions can qualify for life insurance, insurers will simply decline applicants if they have certain health impairments. Those can include—but aren’t limited to—current alcohol abuse and recent treatment, cirrhosis, current cancer treatment, drug use, recent heart attack, HIV, kidney dialysis mental illness that required hospitalization in the past year and suicide attempt in the past year.
How Your Risk Class Affects Your Life Insurance Rate
The smaller your insurance premium, the better your rating. According to Balderson, the baseline is the “standard” rating. Rates decrease for each class above the standard and rise for each table rating below the standard.
According to Balderson, an A or 1 table rating will typically cost 25% more than the premium for the basic class. Rates increase as the table ratings do (B, C, D, 2, 3, 4, etc.). From highly preferred [rates] to table rated, there can be a sizable difference, according to Balderson.
For example, a 35-year-old woman in the preferred plus class could get a $1 million, 30-year term life policy with an annual premium of $613, Balderson says. The preferred class premium would be $732, and the standard class rate would be $1,192.
If you’re a smoker, you can qualify for the preferred or standard class if you meet the other criteria for those classifications. Rates for smokers will be higher than nonsmokers even if they’re in the same risk class. Using the same example as above, the preferred rate for a smoker would be $2,320 a year. The annual premium for a smoker in the standard class would be $3,000, Balderson says.
The difference in premiums for permanent life insurance policies for nonsmokers versus smokers can be even more dramatic. For example, Kerins says the annual premium for a 45-year-old woman with a $1 million universal life insurance policy from John Hancock would be $8,800. A smoker in the standard class would pay $14,348 for the same policy. (Permanent life policies are more expensive than term life policies.)
How to Get the Best Life Insurance Rate
It’s relatively easy to qualify for the best risk class and, consequently, the best life insurance rate. Balderson advises, “Be healthy, lead a clean lifestyle, and you’ll get the greatest rate.” It’s true that saying than doing.
To improve your chances of receiving a higher rate, follow these steps:
Don’t wait in hopes of improving your health. If you’re not the picture of perfect health, don’t wait to apply for coverage in hopes of improving your health, Kerins says. If you need life insurance to provide a financial safety net for your loved ones, waiting to apply will only increase your chances of something happening to you. Plus, with each year you age, the premium increases 3% to 5%, Kerins says. So any savings you might see by improving your health could be eliminated by the higher premiums you’ll have to pay because of your age.
Consult a self-employed life insurance agent. Independent agents can compare prices for you because they work with various insurance providers. They probably also are familiar with the underwriting standards of those businesses. Independent agent Balderson claims he asks clients about their medical histories in order to match them with insurers who have the best underwriting standards for their circumstances.
Don’t cause alarm. Before submitting an application for life insurance, Balderson advises against seeing the doctor and getting a battery of diagnostic tests. When the insurance provider reviews your medical records, it can find something suspicious if the doctor, for instance, recommends a stress test for your heart. Additionally, avoid making international travel arrangements because doing so will probably result in the delay of your life insurance application.