This is a true statement, even if you are in perfect health. You are, in fact, a risk to your life insurance company. However, I didn’t mention that there are good risks and “not-so-good” risks. This is what the life insurance underwriter determines after you submit your application. Simply put, an underwriter assesses risk, “selects” those risks the insurance company is willing to take and, for the purpose of establishing a price (premium), assigns a classification of the risk. Applicants that present a greater risk to the insurance company will be asked to pay higher premiums.
Assessing the Risk
The main risk an insurance company faces is that of an insured person dying sooner than expected. Life insurance companies invest the premiums collected from all its policyholders. An early death removes money from its investment pool, lowering their returns. It is this risk of “early” death that insurance companies try to control through underwriting. The higher the risk of early death (and payment of benefits) a life insurance applicant presents, the higher the premium that applicant will pay. If the risk is too great or imminent, the insurance company might not even make an offer.
The risk factors that life insurance companies consider in underwriting can be either medical or non-medical. Medical factors can include current and past health history, as well as family medical history. Non-medical factors include driving record, avocations, financial records (usually only for higher amounts) and occupations. This information is collected from your application and required medical exams, from your physician and possibly from the MIB (Medical Information Bureau) and the DMV (for driving record).
Classifying the Risk
As I mentioned earlier, those who present a higher risk will pay a higher premium than those who are less risky to insure. To accommodate varying levels of risk and to help insurance companies decide which risks to take, insurance companies have developed risk classes (also known as health classes). While there is no industry standard, per se, most companies use similar nomenclature:
- Super Preferred (or Preferred Best) – As the name implies, the greatest expected mortality of the group.
- Preferred – Better than average expected mortality.
- Standard – Average expected mortality.
- Sub-Standard (or Rated) – Lower than average expected mortality.
- Decline – Expected mortality too low to insure.
Insurance company underwriters utilize Mortality and Probability statistics to help make all of this fairly predictable. Because the financial health of the insurance company is important to both the company (and its shareholders) and the policy owners, these statistics have been painstakingly gathered and tested to insure their reliability.
It is important to work with a knowledgeable life insurance broker to help you get the right policy at the best risk class and premium for you. Insurance companies all use different criteria in underwriting and a good broker will guide you to a company that will rate you in the best health class for your risk factors.