Before you can understand how an insurance company rates substandard risks, you first need to understand what the term means and whether or not it applies to you.
It is an insurance industry term for an individual considered below average or an impaired insurance risk due to their dangerous habits, health condition, family history, hazardous occupation/hobby and/or residence in unhealthy surroundings.
It can also be referred to as impaired risk.
Insurance companies can use several methods to assess what premium rate class will be assigned to that individual based on their substandard risk(s). A higher premium is assigned to these individuals to help lessen the financial risk an insurance company will take on insuring this person.
Below are five methods that insurance companies may use to assess substandard risks:
Extra Percentage Tables
The method of using extra percentage tables is perhaps the most common method. It relies on a numerical system devised to calculate premium rates for those who present a higher health risk to the insurance company.
A number of premium rates are established for varying ages and policy types based on the number of deaths per thousand that will increase with age for varying cases. The additional rate will vary from company to company and from risk to risk. The rate may be 125 percent to 500 percent of the standard premium rate.
This method is commonly utilized in health-related issues.
Permanent Flat Extra Premiums
With this method, insurance companies will charge a fixed amount per $1,000 of insurance over and above the standard premium charge. The good news is that this additional charge may be removed in the future if the health condition significantly improves.
Temporary Flat Extra Premiums
The temporary flat extra premium is exactly the same as the method described above except the extra charge is only for a designated period of time. This method is used when the risk is higher towards the start of the policy but lessens with time. For example, surgery.
Rating-Up in Age
A method that was once very popular in the past and still favored by some companies is to “rate up” the age of the applicant. In simpler terms, the insurance company will assume the applicant is older than stated and therefore charge the higher rate that would normally be charged at that age.
This system allows the insurance company to place a lien on the policy and is mostly used when the applicant has extensive or severe health problem and has a higher mortality risk. If the insured died prematurely, the death benefits are decreased by the lien which is held in conjunction with the relationship between the premiums paid and death benefit.