Risk ratings help set life insurance rates
- Life insurers assign ratings to policyholders such as "preferred" or "substandard."
- The ratings are based on your health, driving record and other criteria.
- The rules can be "stretched" in some cases to give you a better rating.
When you apply for life insurance, the underwriter will typically "rate" you by placing you in a predetermined risk class with ambiguous names such as "super preferred," preferred," "standard" and "substandard."
The rating you're stamped with will help dictate the life insurance rates you pay, says Dr. Jacki Goldstein, vice president and chief medical officer for MetLife. "We group risks that have similar characteristics for the purposes of determining the price. Each of these risk classes is what has a premium assigned to it. The better your risk class, the lower your premiums would be. "
What do these risk classes actually mean? And more importantly, how much can you save on your premium by improving yours?
The answers lie in the often proprietary methods that life insurance companies use to crunch your personal data and identify the financial sweet spot between their risk exposure and your posthumous payout.
How ratings work
A life insurance underwriter's job is to guess how long you're likely to live based on your physical characteristics (such as age, sex, height, weight, medical history, blood pressure and cholesterol level), behavior (such as alcohol, drug and/or tobacco use, extreme sports), family history, financial standing, driving record and geographic location.
If your data suggest you'll be around a long time, you may warrant a preferred, or more favorable, rating because the company stands to collect years of premiums with which to pay your death benefit. If you have a few health problems and/or you smoke, you'll probably find yourself in a standard, or middle-of-the-road, class. If your health condition is chronic or severe (such as heart attack, organ transplant or liver disease), you could be rated substandard -- at the low end of the scale -- or even be denied coverage.
Your rating class, combined with the amount and length of coverage, will determine your life insurance rates. The number of classes and the names of each class vary somewhat by insurer, making it difficult for consumers to compare apples to apples.
"Where the price break is from one preferred class to another does vary company to company," says Al Klein, a Society of Actuaries fellow and consulting actuary for Milliman, a Seattle-based consulting firm. "Some of it is based on research, and some of it is based on where they think their competitors are at and how competitive they want to be."
Klein says traditional life insurers take a "knockout" approach to ratings. For example, a company might have a cholesterol threshold of 240 (mg/dL), and if yours is 245, you could be knocked out of a higher ratings class, even if you otherwise look squeaky clean, he explains.
In recent years, more aggressive carriers have switched to a less harsh "debit/credit" approach.
"You'll get a certain number of points for each of your readings and then they add them up and that dictates the class you're in," Klein explains. "So if someone had cholesterol at 245 and the cutoff was 240, they wouldn't necessarily miss the class if other readings gave them better points."
'Stretching' the rules
Many insurers now allow their underwriters to use "stretch criteria" to "stretch" you into a better class if your numbers are close.
Preliminary results from a new Society of Actuaries survey found that 65 percent of insurers now allow stretch criteria, says Klein. Some can even grant you a one-time exception to a rating rule in certain situations.
While insurance companies typically won't divulge their ratings methodologies, insurance agents and brokers monitor them, either informally through the insurers themselves or by tracking the ratings their customers receive.
"There are agents that know that if a person has this type of impairment, I'm going to take it to this company, and if they have that type of impairment, I'm going to go to this other company because they're a little more lenient on it," says Klein.
Improve your rating
How much might you save on life insurance rates by improving your risk class?
"It varies by company and the number of risk classes they have," says Klein. "If there are only two preferred classes, there could be a 50 percent difference in premium, more or less. But if there are four preferred classes, then the difference is going to be more like 15 (percent) or 20 percent."
At MetLife, for example, a preferred rating on a universal life policy will save you about 20 percent over a standard rate, according to Kevin Finneran, assistant vice president of life product management.
And, what's the best way to improve your risk class?
"Be healthy," says Klein. "Target the red-flag issues -- body mass index, cholesterol, blood pressure -- and bring them within range through diet, exercise and/or medication."
As for tobacco use, is it true that quitting smoking a few days before the medical exam can keep you out of the smoker class?
"If you can stay off of nicotine for much shorter than you ever expected, it won't show up in the testing. You wouldn't believe how short a period of time it is," Klein says. Hint: Think days, not weeks.
Florida-based a ttorney and life insurance consultant Judith Hasenauer says the key to better life insurance rates is to tap your insurance agent's expertise on companies and their ratings, both to comparison shop before you buy and to request a rate review in the future when your cholesterol, blood pressure and other numbers improve or you quit drinking, smoking or skydiving.
"When you're looking, rates may be Nos. 1, 2 and 3 on your list, but don't forget that you want an agency that's going to serve you," she says. "That's what they get paid to do."