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. 
  1. Personal Lines Insurance

    Personal lines insurance includes property and casualty insurance ...
  2. Cover Note

    A cover note is a temporary document issued by an insurance company ...
  3. Cumis Counsel

    Legal counsel chosen by the insured when the insurer has a conflict ...
  4. Cancelable Insurance

    Cancelable insurance may be voluntarily terminated by either ...
  5. Assessable Policy

    Assessable Policy is a type of insurance policy that may require ...
  6. Conversion Privilege

    Conversion privilege is an insurance policy in which the insurer ...
Related Articles
  1. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own, your insurance contract.
  2. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  3. Insurance

    12 Insurance Questions for High Net Worth Families

    High net worth families should ask themselves these 12 questions regarding comprehensive insurance.
  4. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  5. Insurance

    12 Car Insurance Cost-Cutters

    If car insurance costs are dragging you down, use these tips to free yourself from some of the extra weight.
  6. Insurance

    Homeowner's Insurance Guide: A Beginner's Overview

    Everything new homeowners need to know about homeowner's insurance to protect their residence.
  7. Insurance

    Insurance, Excess Insurance and Reinsurance: What's the Difference? (ALL)

    Understanding the differences might help you avoid being overinsured or underinsured.
  8. Insurance

    The Dangers Of Stranger-Owned Life Insurance

    Find out how these policies can be used to abuse the system that many people rely on for protection.
  9. Insurance

    Ways To Make Insurance Exciting

    If you have no interest in insurance, these practices might make you care.
  1. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  2. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
Hot Definitions
  1. Market Capitalization

    Market Capitalization is the total dollar market value of all of a company's outstanding shares.
  2. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  3. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  4. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  5. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  6. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
Trading Center