What the heck are life insurance classifications?

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What the heck are life insurance classifications?

A sad but true fact about life insurance is that not all policies are created equally. 30-year-old Joe won’t necessarily get the same policy as 30-year-old Mike who lives next door. That may seem like a no-brainer: of course two different people are going to get two different policies!

But have you ever wondered how insurance companies decide who pays what for their life insurance? They use a system of classifications to determine someone’s health based on a series of factors about that particular individual. We’ll dive into this classification system so you have a better idea of what you’re up against when you apply for life insurance.

Why are there life insurance classifications at all?

First, it’s important to know why insurance companies use different classifications, and it has to do with risk. Insurers want to figure out which of their customers are more likely to die while the policy is in force, because those are the policies that will cost money for the insurer to pay out. If they cover too many high risk customers and don’t.

If Joe buys a 30-year term policy when he’s 30 years old and is still alive on his 61st birthday, Insurance Company X won’t have to pay anything. But if Mike gets the same policy and dies when he’s 55, Insurance Company X has to pay the policy’s death benefit--which is usually in the millions--to his beneficiary.

By looking at the health factors of the two men – current health, lifestyle, family history, and so on – Insurance Company X can see that Mike, who smokes and pilots small aircraft and whose family has a history of heart disease, has a higher chance of dying before he turns 60 than other men his age. Because of this increased risk, his policy premiums will be higher than Joe’s – maybe considerably higher.

What determines a classification?

As you noticed with Mike in our story above, insurance companies look at a wide range of health and lifestyle factors to figure out which classification you fall into. Each insurance company has their own criteria for determining the weight of each factor and how it affects your classification, which is why you may see different quotes from company to company.

Another reason you may see different quotes is due to something called "stretch criteria." According to a 2012 study by the Society of Actuaries, 65% of polled insurance companies have instituted a policy of "stretch criteria," defined as "any formal written rules that exist outside a company's traditional published preferred criteria[, and] that allow underwriters to vary from the preferred criteria." Essentially that means that companies allow some wiggle room for underwriters to look at other criteria when judging an applicant’s risk. The same study showed that companies did this primarily to allow flexibility in assigning classifications and to remain competitive against other companies who might be willing to offer someone better premiums.

Here are some of the most common factors that go into determining one’s classification:

Height and weight

This is one of the more obvious categories. The insurance company will take a look at your height and weight to see where you fall within a certain range. Those with an appropriate weight for their height will come off the best, while those who are overweight will have a strike against them. The "acceptable" weights are different for men and women.

Keep in mind that insurance companies don’t just look at your current weight, but also your history of weight. Losing weight can help you save money on your life insurance, but not if you’ve lost (or gained) 10 or more pounds within a year of your application. Why? Companies are wary of large fluctuations and want to see stability. This ensures that you didn’t lose weight just to get a better deal on your premium and are going to hit the snack food and soda hard right after you’re approved. Or, on the other hand, they don’t want to assign you a classification if it looks like you’re going to continue to blow up like Violet Beauregarde.

Tobacco use

They don’t mention it on the Surgeon General’s Warning, but smoking is bad for your life insurance premiums, too. Regular smoking is a major knock, but occasional smoking (like a cigar every now and then) or chewing tobacco can also have an effect on your premiums.

Many insurance companies will have levels specifically for smokers, as we’ll see in a bit.

Alcohol and drug abuse

Having a beer every once in a while won’t affect your premiums, but insurance companies will take a look at histories of abuse for alcohol and drugs when making their determination.

Family health history

This is a big factor, and one that’s mostly out of your control. If your family has a history of illnesses, such as heart disease, it’s a red flag. This will count against you especially if there’s a history of death before the age of 60.

Lifestyle

A catch-all category that includes how risky you live your life. If you’re a base jumper, a fan of flying single-engine planes, or a bear wrestler, your chance of a premature death is a bit higher than someone whose hobby is to curl up with a nice book on the couch. Unfortunately, you’ll pay a little more for those thrills.

This could also include driving history. If you have DUIs or DWIs on your record, your premiums will be higher. Also, consider grabbing an Uber every once in a while.

What are the different classifications?

In general, there are four different classifications: Preferred Plus, Preferred, Standard Plus, and Standard. Some companies will have different names for them, but these are the most widely used.

Then comes Substandard, which is a broad category that will include anyone who doesn’t fit into the above.

Finally, as mentioned, some companies will have categories exclusively for those who identify as smokers.

Preferred Plus
Sometimes called Preferred Elite, Super Preferred, or Preferred Select, a rose by any other name is still the best classification you can get. You’re royalty to an insurance company. You’re in excellent health, you have an ideal height/weight ratio, and your family history is as squeaky clean as your lifestyle.

Well done, you’re paying the lowest premiums!

Preferred
In this case, second place isn’t so bad. You won’t be getting the same deals as a Preferred Plus member but outside of a few minor factors, like high cholesterol or blood pressure, you’re in very good health.

Standard Plus
You’re still doing pretty good. You’re in good health, but you might have a few outliers to keep an eye on and you’re not in the ideal height/weight range. Your family history is good, so you shouldn’t have any surprises in your future.

Standard
You don’t have the best height/weight ratio, you have an average life expectancy, and your medical test came back with a few notes. The main difference here is that your family history plays a role, and there are instances of family members having issues with something before the age of 60. But you’re still able to get insured, which is the important part.

Substandard
This isn’t a specific rating classification like the others; instead, based on your health and history, you’re placed in what’s called a table rating system, graded by either letters or numbers (typically either A-J or 1-10). This is because you have a complicated health history, or you’ve had some recent problems, such as a heart attack or diabetes.

Your premium price will, on average, be the Standard price plus 25% for every step down the table:

A = Standard + 25%
B = Standard + 50%
C = Standard + 75%
D = Standard + 100%
E = Standard + 125%
F = Standard + 150%
G = Standard + 175%
H = Standard + 200%
I = Standard + 225%
J = Standard + 250%

You could be paying as much as an extra 250% on your premiums, which isn’t ideal. But again, you can get insured. If you have dependents who are counting on your income and need protection, you’ll still be able to help them in the event of your death.

Smoker
If you smoke, insurance companies will typically have two levels to cover you. Due to the added health risks, you’ll pay more as a smoker.

Preferred Smoker is just what it sounds like: you’d probably fall into the Preferred classification if you didn’t smoke. This will usually cover occasional smokers or people who use smokeless tobacco.

As a Standard Smoker, you’d fall into one of the Standard classifications if it weren’t for those pesky cigarettes. You should try knocking the habit, for your general health and not just the premium savings.

So what does all of this mean for you? You probably knew that your health affected your premiums; after all, when you apply for life insurance, you have to go through an interview process and schedule a medical exam. But now you have a better idea of how this information is used. Some of it is within your control and some of it isn’t, but hopefully it inspires you to live a healthier life regardless.

Image: Michael Coghlan