Impaired Risk Insurance Products
Most people are not familiar with impaired risk life insurance and annuities products, which form a specialized niche within the insurance industry— and not all insurance companies offer impaired risk products. But life insurance is available for substandard, or impaired risk clients, with a shortened life expectancy. Some of the factors that can trigger a high-risk rating include:
- Complicated health issues, which may include family histories with illness or premature deaths, the use of tobacco products, or above-average alcohol consumption.
- Poor driving records, or a history of moving violations
- Hazardous occupations (examples might include work on off shore oil rigs, or jobs that involve travel to high-risk countries).
- Participation in dangerous hobbies, such as drag racing, mountaineering, or skydiving.
All insurance applications are reviewed by underwriters who evaluate a variety of risk factors and determine the applicant's life expectancy. A standard rating indicates that the applicant has an average life expectancy and mortality risk, and some companies offer only the basic rate classes (preferred, standard and smoker). Others offer rate classes (such as preferred smoker) which make applicants feel that they're getting a more exact rating. But no matter how many classes an insurer offers, the underlying policy costs are fairly uniform in between companies.
With an impaired risk annuity you invest a lump sum to an insurance company in exchange for a single life guaranteed income stream. When you pass away the payments end. Based on your medical profile, the insurer estimates your life expectancy and offers a monthly or annual payment that is usually higher than a healthy individual would receive. The shorter your life expectancy the higher the payout. Since it is a single life annuity the insurer is betting that the total amount they have to payout will be less than the amount you invest and they can profit from the transaction. However, if you live longer than expected, for example a new medication or treatment is developed for your condition, you could instead live longer than expected and receive significantly more income over your lifetime with the insurer taking a loss.
Life insurance rates are based on risk classes and individual policies have a set cost of insurance and fees. The premium an applicant pays is based on the assigned rate class. Insurance underwriting rate classes differ by company, but usually include -- Preferred Best, Preferred, Standard Non Smoker, Smoker and sub-standard. Underwriters follow established guidelines when evaluating an application and match it to a risk class that is established by the insurer. In some cases to avoid taking all the risk an insurer may use re-insurance to spread the risk among several companies. This could affect the assigned rate class since it would have to be acceptable to all the companies.
A substandard life insurance rating means you will have to pay a higher premium for the same amount of coverage which reduces the internal rate of return (IRR) on the death benefit. IRR calculates the return each year for the premium you are paying. For example, a healthy 45 year old male may pay $1,500 a year for $1 million of 20 year level term coverage while another 45 year old male with a substandard rating could pay more than $3,000 a year for the same coverage. If both 45 year olds passed away in year 10 the healthy male’s family would have paid $15,000 for $1 million of death benefit while the rated male would have paid more than $30,000 for the same coverage providing a lower IRR on the premium paid. Also, the healthy male could have invested the $1,500 a year elsewhere earning an additional return.
If a substandard rating is assigned because of a dangerous occupation or hobby, insurers may reconsider the case (and remove the rating) when the applicant moves to a safer job, or quits the dangerous activity. If the rating pertains to a health issue, other than than the use of tobacco products, it may be much harder to remove. (A smoker's rating can be removed, quite easily, by quitting and attesting to that fact.) However, if the insurer removes a rating, but later discovers the reduction of risk was misrepresented it can contest the death claim and/or levy additional premiums that should have been paid before paying the death claim. Adjustments to ratings are not automatic, and requests for them must be received by the insurer in writing.
Application and Underwriting Process
The application and underwriting process for impaired risk insurance cases is far more complicated than a typical, low-risk insurance case. The services of an experienced insurance broker will most likely be needed and you should have a realistic expectation about what information the insurer may require and what they may offer for coverage. A broker can help you screen companies to determine which ones might offer more favorable rates, and help you organize the additional documentation that tends to complicate and slow down underwriting.
All insurance companies rate or decline applications based on their own, company specific underwriting standards. A rejection on the part of one company does not mean that every company will automatically decline a case—and an experience broker can also help by ensuring that the case is reviewed by several insurers. Many companies have an inquiry processes that allows health iand other information to be reviewed informally by the underwriters who can give a non binding opinion about what ratings and/or extras may apply. These informal inquiry are not guarantees and applicants will still need to go through a full application process to get a firm rating. But the informal process can help prevent declines from showing up at the Medical Information Bureau which other companies would see.
Underwriting for different insurance products can vary, as well. It's possible for applicant to be declined or highly rated for one product (such as long-term care) but receive favorable ratings for another product (such as life insurance).
Timing is another factor. Insurance companies sometimes offer table shaving programs that improve an applicant’s rating, for example shifting them from table 5 to table 2. And, every year, some insurers will assign better ratings or approve cases they may have otherwise declined, in order to meet year-end financial goals or policies-issued targets.
The difference between approval and decline can rest on any number of facts. Conditions such as cancer, heart disease, diabetes or stroke, which might have resulted in automatic declines in the past, are now being approved. And as medical technology improves, and methods of data analysis evolve, insurers will continue revise their ratings of different conditions. Given the all variables, doing a lot of homework, upfront can make a huge difference in the outcome.