What Is Classified Insurance

Classified insurance is coverage provided to a policyholder that is considered more risky and thus less desirable to the insurer. Classified insurance, also known as substandard insurance, is most commonly associated with life insurance.

Key Takeaways

  • Classified insurance is coverage provided to a policyholder that is considered more risky and thus less desirable to the insurer.
  • Classified insurance, also known as substandard insurance, is most commonly associated with life insurance.
  • An insurer typically charges higher premiums for classified insurance policies to compensate for the added risk of a claim being filed.

Understanding Classified Insurance

Insurance companies often underwrite policies for a variety of different risk classes. Life insurance companies, for example, may provide coverage to healthy individuals since they would consider this group a low risk since they're less likely to die leading to an insurance claim being filed. As a result, the insurance company is more likely to charge lower premiums to healthy people. Insurance premiums are the monthly payments made by the policyholders to the insurers for coverage.

Conversely, the insurer may provide life insurance coverage to less healthy individuals. However, the insurer would likely charge a higher premium to compensate for the added risk of an insurance claim being filed. In other words, there's a higher probability for less healthy people to die sooner than healthy people. As a result, the classifcation of insurance helps insurers identify the policyholders or insureds that are more likely or less likely to file a claim. Classified insurance is designed to provide insurance for those with substandard risk profiles, or what the insurance industry considers, a high-risk group for claim payouts.

Factors that can cause life insurance policies to be considered substandard include whether the insured uses tobacco and the age of the individual involved. Also, health insurance premiums can be three times higher for older people than for younger folks.

How Rated Policies Work

Insurance companies are for-profit corporations, and they ideally want to financially shield themselves if there's a policyholder that's more likely to be involved in an event that could result in a filed claim. Many insurers use a rating system to classify and group policyholders based on the level of risk that the insurer would need to pay out a claim.

Ratings can vary, depending on the insurance carrier, but they typically group people into a preferred, standard, and substandard classification. Preferred policyholders would likely have lower premiums, and perhaps more extensive coverage than those who have a standard rating assigned to them. Individuals who have less than perfect health or are at high-risk due to their occupation might get assigned to a substandard policy, which is called a rated policy. A rated policy is essentially synonymous to a classified insurance policy, although coverage can vary depending on the individual involved.

Reduced Coverage

An insurance company, for example, might protect itself from known medical conditions, such as heart disease when issuing life insurance policies. As a result, the insurer may deny claims based on or stemming from cardio events of the insured. This exclusion would be stated in the insurance contract. Alternatively, the insurer may provide reduced benefits for the condition. In general, eligibility for the policy is expanded to a larger group of people. Still, the scope of the insurance coverage is reduced compared to the coverage provided to policyholders with a standard risk profile.

The Premium Markup

The policy premium is established according to how substandard the risk is considered to be for the insured. Insurers will use a mortality or morbidity table to determine the premium for covering particular health risks, adding a percentage markup to account for the higher risk.

Getting Help

Most applicants for insurance coverage are considered standard risks. For those seeking life insurance and who have a condition that may cause the policy to be rated, should consult an agent or agency that specializes in substandard policies. These agents will know which insurers have the best rates for each type of rated condition. 

Special Considerations

In the past, insurance companies could deny coverage or charge a higher premium for health insurance to people with pre-existing medical conditions. However, with the passage of the Affordable Care Act (ACA), that policy is no longer allowed. In other words, insurance companies can't deny coverage, charge higher rates, nor can they subject individuals to a waiting period because they have pre-existing medical conditions. Also, insurers cannot charge based on gender, meaning they can't charge women and men different premiums or prices.