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If you're thinking about purchasing life insurance, you've probably heard the terms "reinsurance" and "risk class." Of course, these words may sound scary, especially if they make you feel like someone is going to risk your life.
Don't worry. Life insurance companies don't need to know everything about you. But they want to understand what risks you need to cover in order to decide whether or not to offer you insurance and how much to charge. That's why they use a process called underwriting and assign you a specific risk category based on information collected during the underwriting process.
“The underwriting system is designed to provide the fairest price based on a customer's risk profile,” said Neil Kerins, John Hancock's vice president of insurance product development. “It is a concept that aims to balance affordability and coverage for the widest group of people.”
It is important to understand this system and the different risk categories used by insurance companies before accepting coverage. Then you'll have a better idea of what your life insurance rate depends on.
How does the process of purchasing life insurance work?
The registration process involves gathering a lot of information about you, from submitting an application asking about your age, medical and mental health history, family medical history, occupation, and even hobbies.
In most cases, the life insurance company will also obtain your medical records from doctors, your prescription medication history, your driving record, and other records to verify your identity and other risk factors. A “fully confirmed” policy takes all of this medical and personal information into account. The application may also require a life insurance medical examination. (You can skip the test if your insurance company uses "accelerated coverage.")
During the examination, your height, weight, pulse, and blood pressure will be checked. Blood and urine samples will be collected. An EKG may be necessary if you are 50 or older or are applying for a $1 million life insurance policy.
The information collected during sign-up is then used to determine which risk category you belong to. Your risk category will then be used along with your age and gender to determine the price you pay for your insurance.
Understand risk categories for life insurance
Insurers typically use three categories of risk: predominant, preferred, and standard. The criteria for each category are relatively similar from company to company, but specific requirements may vary somewhat. If applicants do not meet the criteria for these categories, they may be classified as ineligible.
Highly preferred risk category
A person who qualifies for the super-privileged category, sometimes called the most favored, has excellent general health, does not engage in dangerous hobbies and does not work in a dangerous occupation, Krenz said. You cannot have a history of tobacco use in the past five years or drug or alcohol use in the past 10 years. You cannot have a history of cancer or heart disease. Most often, a parent cannot die of cancer or heart disease before you are 60 or perhaps 65 years old.
Only a small percentage of applicants qualify for the super franchise, says Todd Balderson, founder and CEO of Maryland-based Balderson Insurance Agency. "You have to follow all the numbers: no fines, no drunk driving, no blood pressure, no cholesterol," he says.
Preferred risk category
A person who qualifies for the privileged risk category has a similar profile to someone who is in the super-privileged risk category. However, they may be taking medications for conditions such as high blood pressure, are slightly overweight, or have a family history that suggests they are at risk.
People with diabetes can qualify for a preferred category if their condition is well managed, as can people with certain mental health conditions such as anxiety and depression. “When you take medication, it's good because you're treating the disease,” Kerins says.
Standard risk category
Most people belong to this category. A person with standard fitness tends to have a higher body mass index, take multiple medications, or have potential health problems, Krenz said. Your driving record does not have to be perfect, and some dangerous occupations such as flying are acceptable. The standard risk classification is also more lenient when it comes to smoking. In general, you should quit smoking within a year (instead of five years). However, you may qualify for a standard category if you are a marijuana user, depending on the insurance company.
Poor quality table
Insurance companies use a rating system of letters or numbers to classify policyholders as low-quality. This classification system is used for those with serious health problems or a short history of health struggles, Kerins explains. Conditions that may require a chart evaluation include previous alcohol abuse or treatment, severe asthma, bipolar disorder, epilepsy, multiple sclerosis, and type 1 diabetes.
Although many people with medical conditions may qualify for life insurance, insurance companies will simply reject applicants if they have certain medical conditions. These may include, but are not limited to, current alcohol abuse and recent treatment, cirrhosis, current cancer treatment, drug use, recent heart attack, HIV, dialysis-related mental illness requiring hospitalization within the past year, and suicide. Attempts . : in the past. the year
Learn: Life insurance for diabetics
How your risk category affects your life insurance rate
The better your rating, the lower your premium. The “standard” rating is the baseline, Balderson says. Thus, points decrease for each point above the standard and increase for each point below the table standard.
Typically, a Schedule A or Class 1 will cost 25 percent more than the price of a standard class, Balderson says. As the board scores increase (B, C, D, 2, 3, 4, etc.), the risks also increase. “There can be a big gap between [betting] favorites and theoretical estimates,” says Balderson.
For example, a 35-year-old woman in the Preferred Plus category could buy a $1 million, 30-year life insurance policy for an annual premium of $613, Balderson says. The premium class fare is US$732, while the standard class fare is US$1,192.
If you are a smoker, you may qualify for the preferred or standard category if you meet the other criteria for that classification. Smokers' rates will be higher than non-smokers' rates, even if they are in the same risk category. Using the same example as above, the discounted rate for smokers would be $2,320 per year. Balderson says the annual price for a standard-class smoker would be $3,000.
The difference in permanent life insurance premiums for non-smokers and smokers can be even more dramatic. For example, Keynes says the annual premium for a 45-year-old woman on a $1 million John Hancock universal life insurance policy would be $8,800. A standard class smoker would pay $14,348 for the same policy. (Permanent life insurance policies cost more than term life insurance policies.)
How to get the best rate on life insurance
The key to getting the best risk category and therefore the best life insurance rate is very simple. “Be healthy, live a clean lifestyle, and you will achieve better results,” Balderson says. Easier said than done, right?
To increase your chances of getting the best interest rate, you can take the following steps:
Don't wait in hopes of improving your health. If you're not in perfect health, don't wait to apply for insurance in hopes of improving your health, Krenz says. If you need life insurance to provide a financial safety net for your loved ones, waiting to apply will only increase the chances that something will happen to you. Plus, premiums rise 3 to 5 percent as you get older, Kerins says. So any savings you might make by improving your health may be wiped out by the higher premiums you have to pay because of your age.
Work with an independent life insurance agent. Independent agents work with several insurance companies so they can compare rates for you. They will also likely know the criteria for signing up for these companies. Balderson, an independent agent, says she talks with her clients about their medical histories to connect them with insurance companies that have the most appropriate coverage criteria for their condition.
No alarm. Balderson cautions against purchasing life insurance without seeing a doctor for a series of medical tests. If your doctor orders a stress test of your heart, for example, that may raise concerns when your insurance company examines your medical records. Also, don't plan to travel abroad, which will likely delay your life insurance application.
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