As enticing as a low quote on life insurance is, it’s a preview, not the whole story. And life insurance websites that tout the lowest quote will not always guarantee the lowest monthly rate.
Why? Because not everyone who buys a life insurance policy is going to pose the same risk to a carrier providing coverage. Insurance carriers need to keep risks minimal to ensure everyone gets a fair premium.
And how do they do that? With risk classifications. These determine what you’ll pay based on how likely the carrier will have to pay out to your loved ones in the event you pass away.
Life Insurance Risk Classifications
When the life insurance company approves your application, their underwriters assign you a risk classification largely based on your health questionnaire and medical exam.
Classifications are made up of people who share the same characteristics that pose a specific level of risk to the company of paying out a death benefit sooner rather than later. The standard risk classification is the baseline. People in preferred risk classifications have the least risk characteristics and pay the lowest premiums; people in the substandard risk classifications have the highest risk characteristics and pay the highest premiums.
It would be great if the life insurance industry used the same names and requirements for these classifications, but they don’t. However, this may be to your advantage.
Because some carriers have strengths their competitors don’t when it comes to these classifications.
One company may consider a BMI of 25 to be optimal and therefore place it in the risk class with the lowest premium; another may see it as acceptable but put it in a risk class with a higher premium.
One company may classify your annual scuba diving trip in one risk class and premium and another company may place it in a higher risk class with a higher premium.
It all depends on the carrier.
It gets even more complicated when you factor in table ratings.
Life Insurance Table Ratings Chart
Anyone who falls below standard risk is placed in the substandard risk classification and will pay more than the standard risk rate. How much more will depend on their table rating. Substandard risk is where the table ratings kick in.
Underwriters use a life insurance table ratings chart to assess how much those who fall into substandard will pay above the standard rate. Increases generally occur at increments of 25%.
Table rates are identified by numbers or letters. Some carriers use numbers and some use letters. But basically, if you are table rated 1 or A, you will pay 25% more than standard rate, 2 or B 50% more, 3 or C 75% more and 4 or D 100% more and so on.
So let’s look at a table rating in action.
Mary is a 35-year-old woman looking at the average life insurance cost per month for a $1 million life insurance policy. She is looking at a 20-year term policy.
She got a quote of $27 per month from Company A.
Mary admitted she smokes when she got the quote. The medical exam she underwent during underwriting claims she’s in otherwise good health. But her driving record reveals she’s had a couple of driving tickets in the past year. (Yes, those do count.)
Company A places her in a substandard risk classification because of her smoking. So, she’s already going to pay more than a nonsmoker. However, they consider her driving risky behavior and give her a Table 1 rating, which adds 25% to her rate. So now, rather than paying $324 per year, she’s paying $405.
Company B quoted Mary $29 per month but doesn’t consider two tickets to warrant a table rating. She ends up paying $348.
Had she gone with the lowest quote, she would’ve ended up paying more than she would if she’d gone with a higher quote.
A low quote is a great place to start. But they can be misleading. You want to collaborate with a company that gives you the whole story.