Substandard Insurance

What Is a Substandard Insurance?

An individual who may not qualify for a standard insurance policy may receive a substandard insurance policy from an insurance provider. Substandard insurance policies contain special or restrictive provisions and will have higher premiums due to the higher risk posed by the individual. Since they are considered a higher risk, it increases the probability that the insurance provider will incur a loss.

Key Takeaways

  • Substandard insurance is for individuals that pose a higher risk of filing a claim.
  • Higher risk insureds include those that have poor physical health or poor driving records, among other things.
  • Insurers look at family and medical history, as well as driving and employment records to assess risk.
  • Hazardous jobs and dangerous hobbies can also trigger a substandard insurance rating.

How Substandard Insurance Works

A broad array of consumers may be forced to seek substandard insurance coverage, including those with poor driving records or individuals with poor physical health. Usually, the coverage extended by the insurance company will be more restricted due to the increased risk of providing coverage to the individual.

If an individual receives a substandard rating because they engage in a dangerous occupation or hobby, insurers may reconsider and remove the poor score when the applicant moves to a safer job or stops participating in the dangerous activity. However, if the rating is related to a chronic health issue, it may be much harder to remove.

Additionally, if the insurer eliminates a rating and later discovers that the risk reduction was from misrepresentation, the provider can contest the death claim and may even charge additional premiums before paying out a death benefit.

Special Considerations

Insurance brokers and other entities submit insurance applications on behalf of clients, and insurance underwriters review the application and decide whether or not to offer insurance coverage.

Underwriters base their decisions on standard risk analysis factors. Companies use risk classification to determine the risk associated with underwriting the policy and the premium charged for coverage.

To determine the risk for an individual application, the company will look at the medical history, prescription medication use, family medical history, driving record, employment, dangerous hobbies such as racing or scuba diving, and smoking habits. The levels of risk classification include:

  • Preferred Plus: Also known as preferred elite, super preferred, or preferred select, is the best classification, and includes those in excellent health, with an ideal height-to-weight ratio, and no red-flag issues.
  • Preferred: Much like preferred plus class gets but may have small but manageable identified health problems such as high cholesterol or blood pressure.
  • Standard Plus: It also means in "good health," but with a few more issues, such as not being the ideal height-weight range or has a family history of a disease.
  • Standard: This includes those considered slightly overweight, but to have an average life expectancy, and a family history of issues such as cancer and heart disease before the age of 60.
  • Substandard: These applicants have complicated health histories, like diabetes or heart disease, poor driving record, hazardous occupation or hobby, drug, alcohol, or tobacco abuse. Also, the company will further identify the individual using a table rating grade with either letters or numbers (typically either A-J or 1-10).

Example of Substandard Insurance

A healthy 50-year-old male might pay $1,500 a year for $1 million of 20-year term coverage, while another 50-year-old man with a substandard rating could spend more than $3,000 a year for the same coverage. If both individuals died ten years into their coverage, the healthy man would have paid $15,000 for the $1 million death benefit. The other man would have spent more than $30,000 for the same benefit.

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

  • Health issues, including a family history of illness or premature death, above-average alcohol consumption, or the use of tobacco products
  • A poor driving record
  • Hazardous occupations, such as working on off-shore oil rigs
  • Dangerous hobbies, such as drag racing or skydiving
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