The price of insurance (the premium) depends on the likelihood the applicant will die before the term of the policy is complete. Insurers use risk factors to place applicants into the following pricing categories:
Preferred Plus – available to those with an ideal body mass index (BMI), little or no family history of serious illness and no additional risk factors such as smoking or participation in extreme sports in the last 2 years or plans to participate in the next year. The timeframe of interest and the definition of extreme sports varies between companies. Common examples are rock climbing above class 5 risk category, base jumping, bungie jumping, skydiving, scuba diving below depths of 100 ft, and rally car driving.
Preferred – available to those with a few minor risk factors, e.g. high blood pressure, high cholesterol or participation in extreme sports.
Standard Plus – available to those in generally good health, but with risk factors such as high or low BMI and smoking.
Standard – applicants with a family history of serious illness before the age of 60 are most likely to be in this category.
Substandard A-J or A-P – applicants with complicated health histories and recent problems such as heart attack or diabetes are likely to be placed in this category. Every step down from A to J adds an extra 25% to the standard premium, i.e. J is standard + 250%. These ratings are also known as table ratings.
Premiums increase with each drop in category. Every insurance company has slightly different criteria for these categories. For example, some companies will penalize smokers more heavily than others and companies may define “overweight” differently.
All insurance companies have separate categories for smokers; some have 2 categories: preferred smoker and standard smoker and others have 4 (preferred plus smoker, preferred smoker, standard plus smoker and standard smoker). Even occasional smoking increases premiums. The definition of a tobacco user varies between companies; some require cessation for 1 year, others 3 years and still others 5 years for an applicant to be considered a non-smoker. Some companies treat vaping in the same way as tobacco usage.
In addition to tobacco usage, the following factors affect rate class:
Medical conditions such as asthma, cardiovascular disease, cancer and depression.
Family history of medical conditions, particularly if a close family member (parent or sibling) died prior to age 60
Profession – people with more dangerous jobs, e.g. construction workers and rally car drivers, will have higher premiums
Hobbies such as skydiving/rock climbing
Some companies allow applicants to improve their category through exceptions. For example, if an applicant is in perfect health but a regular participant in an extreme sport such as mountain climbing, they can move from preferred to preferred plus if their policy has an exception saying it won’t pay out if they die in a climbing accident. In some cases, the applicant may already hold separate insurance for that activity, making an exception the easy choice.
Insurers can attach a temporary extra charge, a “flat extra” to a policy. For example, a cancer survivor could qualify for standard rates plus a $5 flat extra per $1,000 of coverage for 5 years.
The majority of term life insurance policies are level premium policies. The price of the premium and the level of coverage remain fixed throughout the duration of the policy (usually 10, 15, 20 or 30 years). Exceptions to this are the flat extra discussed above and changes in category due to improved health or lifestyle. For example, if an applicant has recently quit smoking or lost weight but not enough time has passed to qualify at the more favorable rate at the time of policy purchase, they may be able to reduce their premiums one or two years down the line. Not all policies allow this, so if an applicant knows she will be eligible for a non-smoking category or expects to maintain weight loss, or complications due to pregnancy may be resolved, it’s important to confirm that re-examination is allowed by the policy. The insurer may allow you to be re-examined, but may then re-set your premium based on your age at the time of re-examination. Since you’ll be older, the premium benefit from a favorable exam may be offset by a higher age-based premium.
The premiums and level of coverage on a level term life insurance policy will not increase if the policy holder suffers a heart attack/is diagnosed with cancer/loses a close relative before the age of 60 to cancer, etc.
Some insurers offer an annually renewable term (ART) life insurance product. These policies can be renewed annually without the need to reapply or take another medical exam. The coverage death benefit remains the same throughout the lifetime of the policy, but the premiums rise each year as the policy holder ages. In general, this type of policy is recommended for those who do not expect to need life insurance for a long period of time. The initial premiums for an ART policy are lower than the those of a level term policy but rise above the latter over time.
I thank Eleanor Akers for drafting this article.