What is 'Substandard Insurance'

Substandard insurance is an insurance policy issued to someone who does not qualify for a standard insurance rate. Substandard insurance policies may contain special or restricted provisions or higher premiums because the insured carries a greater risk, which increases the probability that the insurance company will incur a loss.

BREAKING DOWN 'Substandard Insurance'

Substandard insurance can be extended to a broad array of consumers, including those with poor driving records or with poor physical health. It is important for those purchasing this type of insurance to pay close attention to any special or restrictive provision on the policy, since coverage extended by the insurance company may be more restricted due to the increase risk of providing coverage.

All insurance applications are reviewed by underwriters who evaluate a variety of risk factors and determine the applicant's life expectancy. In the past, many life insurance applications would not be acceptable due the high risk of insuring the individual in question. Improvements in underwriting processes have enabled insurance companies to create classifications of risks into standard, preferred, substandard and uninsurable. 

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 the use of tobacco products, it may be much harder to remove. 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.

Example of ‘Substandard Insurance’

For example, a healthy 45-year-old male may pay $1,500 a year for $1 million of 20-year 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.

Some of the factors that can trigger a substandard rating include:

  1. Complicated health issues including family histories with illness or premature deaths, the use of tobacco products, or above-average alcohol consumption.
  2. Poor driving records or a history of moving violations.
  3. Hazardous occupations like working on off-shore oil rigs, or jobs that involve travel to high-risk countries.
  4. Participation in dangerous hobbies such as drag racing, mountaineering, or skydiving. 
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