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If you have dependents who count on your income, you already know how essential life insurance is in providing financial protection if something happens to you. But have you ever wondered what factors insurers use to decide what to charge for a policy other than the amount of coverage you purchase? The answer lies in your rate class, a set of health and lifestyle characteristics providers use to assess your risk of premature death. Here's how they work.
How Life Insurance Rate Classes Work
Whether you need homeowners insurance, car insurance or life insurance, insurers price policies, in part, based on risk. When you apply for life insurance, the company reviews various factors, including your age, weight, gender, occupation, overall health, family health history and more. Then, the insurer assigns you a risk class based on the likelihood they will have to pay out a claim while your policy is active. Each rate class represents a different level of risk, ranging from low to high.
Insurance companies assign low-risk applicants higher rate classes and high-risk applicants lower rate classes.
What Are the Classes of Risk in Life Insurance?
In general, there are four main rate classes your insurance company may place you in. Because underwriting criteria vary by insurer, different companies may put you in different rate classes, but here are some general guidelines life insurers use when evaluating applicants.
- Preferred Plus: People in this rate class are typically young and healthy. They don't use tobacco products or have a family history of heart disease or cancer before age 60. They have normal blood pressure and cholesterol, work in low-risk jobs and don't engage in high-risk activities like scuba diving or rock climbing.
- Preferred: Although people in this category don't have the lowest risk, they are still in good health and have low-risk occupations and hobbies. However, they may have conditions like high blood pressure or high cholesterol that are controlled with medication.
- Standard Plus: Individuals in this risk class may have a history of more serious health challenges but aren't currently at risk of premature death. They may be overweight and have minor health issues.
- Standard: People in this category have average, not optimal, health, may be on multiple medications and often have higher BMIs than people in the other risk categories. They also typically have a family history of cancer and other serious diseases.
The categories listed above represent the four main rate classes life insurers typically use. However, people with serious health conditions may not fall into any of these categories. In those cases, providers may place them in a substandard rate class. Insurance companies use multiple substandard ratings (sometimes up to 10) based on a person's risk of premature death.
How Your Rate Class Affects Your Life Insurance Costs
Insurance companies price policies based on the likelihood they will have to pay out a claim. People in preferred rate classes pay less than people in standard rate classes because their risk of premature death is lower. Individuals assigned to a substandard rate class pay significantly more for coverage than people in preferred or standard categories.
How to Get the Best Life Insurance Rates
Life insurance may not cost as much as you think, especially if you're reasonably healthy. Even if you have some health challenges, you may be able to find a policy that fits your budget. Here are four steps to help you get the lowest possible rate.
- Decide how much coverage you need. Buying too much life insurance is a surefire way to pay more than necessary. Of course, you don't want to buy too little, either. Before purchasing coverage, decide what expenses you want the payout from the policy to cover and buy enough to pay for them.
- Choose the right type of policy. There are two major types of life insurance: term and permanent. Term life insurance provides a death benefit to your beneficiaries if you die while the policy is active and is relatively inexpensive. Permanent life insurance offers more features, but it also costs more, and the additional benefits may not be necessary. Assess your personal situation to decide which type of life insurance coverage is right for you.
- Shop around. Rates can vary significantly between companies for the same amount of coverage. Additionally, different insurers may put you in different rate classes, which can further affect the price you pay. Comparing quotes from multiple insurers is the best way to ensure you're not paying more than you have to.
- Purchase your policy. Make sure you understand how the policy works. Some have waiting periods, suicide clauses and other rules that can affect whether your loved ones receive a payout.
What Is Your Rate Class?
You can make an educated guess about your life insurance rate class based on your overall health, lifestyle habits and family health history. However, applying for a policy is the only way to know for sure. Because the criteria for determining risk isn't universal, different insurers could put you in different rate classes, affecting your price. Comparing coverage options and quotes from multiple insurers is the best way to find a policy that meets your needs and fits your budget.
This is especially true if you have current health challenges. Getting life insurance is possible if you're not in optimal health, but your rates will be higher. How much higher depends on the insurer and severity of your health conditions.