You must first understand what the term means and whether or not it applies to you before you can understand how a life insurance company rates substandard risks.
It is a term used in the life insurance industry to describe a person who is considered a below-average or impaired insurance risk due to dangerous habits, health conditions, family history, hazardous occupation/hobby, and/or residence in unhealthy surroundings.
It is also known as diminished risk.
Life insurance companies can use a variety of methods to determine which premium rate class will be assigned to that person based on their substandard risk(s). These people are charged a higher premium to help reduce the financial risk that an insurance company will take on by insuring them.
The five methods listed below may be used by life insurance companies to assess substandard risks:
Tables of Extra Percentages
The method of using extra percentage tables is probably the most popular. It is based on a numerical system designed to calculate premium rates for those who present the life insurance company with a higher health risk.
A number of premium rates are established for various ages and policy types based on the number of deaths per thousand, which increases with age in different cases. The additional rate will differ from one company to the next and from one risk to the next. The rate can range between 125 and 500 percent of the standard premium rate.
This method is frequently used in health-related issues.
Permanent Flat Extra Premiums
Life insurance companies will charge a fixed amount per $1,000 of insurance, in addition to the standard premium charge, under this method. The good news is that if the patient’s health improves significantly, this additional charge may be eliminated in the future.
Temporary Flat Extra Premiums
The temporary flat extra premium is the same as the method described above, except that the extra charge is only for a limited time. This method is used when the risk is higher at the beginning of the policy but decreases over time. Consider surgery.
Age Rating Increase
A method that was once very popular and is still used by some companies is to “rate up” the applicant’s age. In layman’s terms, the life insurance company will assume the applicant is older than stated and will therefore charge the higher rate that would be charged at that age.
This system allows the life insurance company to place a lien on the policy and is typically used when the applicant has a severe or extensive health problem and a high mortality risk. If the insured died too soon, the death benefits are reduced by the lien that is held in conjunction with the relationship between the premiums paid and the death benefit.