An Introduction to Impaired Risk/Substandard Life Insurance Underwriting

Impaired Risk Life InsuranceImpaired risk life insurance is a trickier realm of the life insurance industry. It involves securing life insurance for people who have health impairments or whom have had health events in their life, which place them at a greater likelihood of a shorter life expectancy, and make insuring their lives riskier for life insurers.

The difference between an approved life insurance application and a declined life insurance application can be incredibly and surprisingly minor. However, a decline from one company, can greatly increase the odds of a decline with another, so it pays to do a lot of work upfront and meticulously pick out the appropriate insurer for an individual.

Life Insurance Underwriting Risk Classes

Life insurance rates are based on the risk class at which the policy is issued. Individual life insurance products do not have varying premium rates like group insurance, or even individual property and casualty insurance can. The prices are set with policy approval within each state that the contract is approved for sale.

This means an underwriter has a finite list of options when it comes to making a proposed insured an offer on a life insurance application. The typical life insurance underwriting risk classes are:

  • Preferred Best (sometimes Plus)
  • Preferred
  • Standard non-smoker
  • Smoker

Some carriers will place additional risk classes between standard and preferred (standard plus) and offer preferred smoker rates—for people who are healthy, but smoke…yeah I’ve always sort of scratched my head over that one, too.

The guidelines that underwriters follow when it comes to evaluating a proposed insured and matching them up with the appropriate risk class are established by the insurance company, usually with heavy influence from the guidelines put together by reinsurance companies.

When an underwriters reviews an application, he or she looks at the insured’s health profile, and determines what risk class they should be offered, which means he or she picks, what sort of price should be offered to the insured to match the risk of insuring the proposed insured’s life.

What it means to be Standard

Contrary to popular belief being issued at standard life insurance rates isn’t a bad thing. It means the underwriter believes you have average prospects for mortality (i.e. you’ll probably die sometimes around your life expectancy).

Some companies have marketing departments that are really good at understanding the power of semantics and labels, so there’s been a practice within the industry to issue truly standard insureds at preferred rates. There really isn’t much of a discount to this, just an inflated preferred rate. Conversely, we can also criticize companies that only really want to underwrite super healthy people under the assumption that they’ll never pay an insurance claim, and as such inflate their standard rates to push the regular health prospects away.

That’s all well and good, but what happens when someone has a health condition that means they may die sooner than life their standard life expectancy?

Enter Table Ratings and Flat Extras

Typically the most common measure taking to appropriate price an offer for insurance to someone who should not be issued at standard is what’s referred to within the industry as a table rating. A table rating is a percentage increase of standard rates, and the tables range from 1 all that way to 16 with some companies (conversely, some companies choose to use letters, so A to P would be the equivalent). Table ratings as percentage increases start at 25% from standard rates and move up in increments of 25%.

Flat extras are an additional charge assessed per $1,000 of death benefit. Typically flat extras are used to account for additional risks that are temporary in nature. Flat extras can be used in conjunction with table rating for individuals who have a health situation that places them below standard and have a condition that is expected to improve with time.

Underwriting a Sub-Standard Case

Working to acquire life insurance when one has a condition that places them in the sub-standard area certainly requires some careful attention. A common practice is to perform something known as an informal inquiry. An informal inquiry is a process of collecting health data, traditionally through the ordering of the proposed insured’s medical records and having underwriting review them, to determine if the proposed insured would be offered a policy if he or she applied, and approximately what the underwriting risk class would be.

The primary strategy behind informal inquiries was to avoid declined applications, which are typically stored at the Medical Information Bureau or MIB (a repository used by insurers to report applications and claims/insurance use). Some companies report information inquires to the MIB so this has become slightly less successful at preventing insurers from comparing notes with each other on a potential insured, but an informal inquiry record is still way better than a declined application record in the MIB.

Still a lot of care should be taken prior to submitting paperwork to an insurer to ensure as best an offer for a proposed insured as possible.

When you should take this Approach

If you have a health condition that would cause you to question whether or not an insurer would issue you a life insurance policy, it’s wise to begin considering an impaired risk strategy. Conditions like heart disease, cancer, diabetes, and stroke are some of the most common circumstances that warrant a more careful approach to applying for life insurance. The good news is all of those health conditions can still be issued life insurance in a lot of cases.

There are some realistic expectations that should be set. Obviously conditions like the above named ones (and several others) will mean higher premiums.

Guaranteed Issue, Know when to Fold ‘em

In some circumstances, it’ll make more sense to look in the guaranteed issue direction. These policies traditionally have a “graded” death benefit that is essentially a return of premium for two years for any occurrence of death, with a full death benefit paid on death thereafter.

However, these aren’t traditionally the best go to policies just because you might have what you’d view as a serious health condition. These policies tend to be much higher in premium for the relative death benefit.

But…

As we noted a few weeks ago, sometimes going through full underwriting to save a little money doesn’t make a lot of sense. For those looking for a small policy to take care of final expenses, there’s probably no reason to put yourself through the work of a fully underwritten application if there’s a strong degree of doubt regarding your ability to secure an offer.

Details Matter

I’ve told agents I’ve met that if your in the life insurance business, and you choose not to hone your understanding of various health and medical conditions, you’re making a huge mistake. They used (and in some cases still do) call us field underwriters for a reason. And company underwriters are not infallible—they also will never have the relationship and understanding of a proposed insured that an agent/broker has.

It’s wise to be well apprised of as many health conditions and how those conditions are viewed by underwriting as possible. It’s also wise to spend a little time discussing health conditions with your clients. That can make a huge difference in the success rate of an approved impaired risk life insurance application.


One Response to “An Introduction to Impaired Risk/Substandard Life Insurance Underwriting”

  1. Adam says:

    Interestingly I have found that by blending a policy for somebody rated (say with type I diabetes table 8), you can actually A) reduce the premium by around 30% from a traditional policy and B) if you account for the large cash balances that appear from day 1 you can reduce the NET cost by more than 50%..

Leave a Reply