Life insurance rate classes are generally the determining factor in what your premium will be for a given amount of insurance. Plug in your age and the cost per thousand for, say, a standard plus rate class and there it is.
While what they are called may vary from company to company, in general the four primary rate classes are preferred plus, preferred, standard plus and standard. For the sake of some examples we’ll use a 57 year old guy (me) who wants $250,000 of 15 year term insurance. At preferred plus rates my annual premium would be $725. If at best I qualified for a standard rate it would be $1305 annually.
If my health wasn’t good enough to qualify for a standard rate class the companies have three options. The first, if they consider my mortality risk to be high enough, is to decline to offer coverage. In that case I would review the reasons for the decline and shop it to other companies to see where I might at least get a rated policy.
“Rated” refers to a premium determination method called “table rating” where each table represents 25% above a standard rate. So, if I had a two vessel angioplasty 4 years ago and a company determined that I qualified for a standard table 4 rate, that would be 100% above a standard rate, or about $2600 annually. Now just so no other agents throw darts at me, all companies don’t rate off of standard. Some rate off standard plus and some rate off of a mythical “Special” rate that only company software can compute. There are also a few companies that don’t use 25% per table, but generally speaking it is 25% per table added on to the standard rate class.
Table rated life insurance is the premium determining method for most health issues. If a person is diabetic, obese, has heart disease or has a history of mental health issues, these would be likely table rating scenarios.
The other way insurance companies handle higher than standard mortality risks is what is called a “flat extra” charge. The flat extra can be temporary, say for 5 years, or it can be permanent. A good example of something that would require a permanent flat extra is if someone has what is considered a dangerous occupation or hobby.
Let’s say I’m perfectly healthy (fun to make believe anyway), but I happen to be a helicopter pilot for the Denver police. The insurance company would be OK with letting me slide as a helicopter pilot flying privately, but they see an added risk to the fact that I chase robbers, so they decide they want to charge a permanent flat extra charge of $2.50 per thousand per year to cover that risk. So, my health gets me $250,000 of 15 year term for $725 a year and my aviation practices will cost an additional $625 (250 x $2.50) a year. My total life insurance premium would be $1350 a year and that would cover all causes of death including an accident while flying. That extra charge would stay there as long as I was participating in that type of aviation. If I retired from the police department and kept flying privately I could likely negotiate dropping the $625 charge.
A good example of when a company might use a temporary life insurance flat extra is after successful treatment for kidney cancer. The company guidelines might indicate that they should charge a $5 flat extra per thousand per year for 5 years after treatment is finished. In most cases a temporary flat extra is added to either a standard rate or a table rated premium. So, if I have to pay $1305 for my policy at a standard rate and a flat extra of $1250 (250 x $5), for the first 5 years my policy would cost $2555 a year. Since the flat extra is temporary, the rate would automatically drop back to the standard rate of $1305 in the 6th and subsequent years.
Bottom line. Whatever the end result, the way your life insurance premium is determined is a measure of the underwriter’s take on your mortality risk. The good news, even when the conclusion is a table rated offer or has a life insurance flat extra charge, is that you’re being offered coverage that doesn’t have any restrictions on it.