A substandard Insurance can be offered by an insurance provider to individuals who are not eligible for standard insurance policies. Due to the greater risk that the individual poses, substandard policies will contain restrictive or special provisions. They may have higher premiums. They are considered to be a greater risk and increase the likelihood that an insurance provider will suffer a loss.
How Substandard Insurance Works
A wide range of customers may have to look for substandard insurance coverage. This includes those with poor driving records and people with poor physical health. The increased risk of the individual being covered by insurance companies will mean that the coverage they offer is more limited.
Insurers may consider removing a substandard rating if an applicant is involved in dangerous hobbies or occupations. It may be more difficult to remove a rating if it is due to a chronic condition.
If the insurer removes a rating but later finds that there was a risk reduction due to misrepresentation, they can contest the death claim. They may also charge additional premiums prior to paying out a death benefit.
Take Note
Other entities and insurance brokers submit insurance applications for clients. Insurance underwriters review and decide whether to offer insurance coverage.
Standard risk analysis factors are the basis of underwriters’ decisions. To determine the level of risk involved in underwriting a policy and to calculate the premium for coverage, companies use risk classification.
The company will assess the applicant’s medical history, prescription medication history, family medical history and driving record. It will also consider the applicant’s employment history and dangerous hobbies like racing or scuba diving. These are the levels of risk classification:
- Preferred PLUS: Also known as preferred elite, super-prefer, or preferred select, this is the highest classification and includes people in good health with a perfect height-to-weight ratio and no red flag issues.
- Preferred : Similar to preferred plus class but may have minor but manageable health issues such as high blood pressure or cholesterol.
- Standard plus: This also refers to being in “good health”, but there are a few other issues such as not being within the ideal height-weight range, or having a family history with a disease.
- Standard This includes people who are slightly overweight but have a normal life expectancy and a family history that has included heart disease and cancer before age 60.
- Substandard These applicants have complex health histories like heart disease or diabetes, poor driving records, dangerous occupations or hobbies, and abuse of drugs, alcohol, and tobacco. The company will also identify the individual by a table rating grade using either numbers or letters (typically A-J or 1-10)
Example of Substandard Insurance
For $1 million of 20 year term coverage, a healthy male 50 years old might pay $1500 per year, while a man 50 years older with a substandard rating may spend more than $3,000 each year for the same coverage. The $1 million death benefit would cost $15,000 if both men died within ten years of their coverage. For the same benefit, the other man would have paid more than $30,000
Some factors that could trigger a substandard rating include:
- There are many health issues that can be raised, such as a family history or premature death, excessive alcohol consumption or use of tobacco products.
- A poor driving record
- Hazardous occupations such as those on offshore oil rigs
- Dangerous hobbies like skydiving or drag racing are not recommended.
