The true cost of life insurance classifications

Share
More
The true cost of life insurance classifications

Ratings are everywhere around us.

We rate our Seamless deliveries. We rate the shows and movies we watch on Netflix. We rate our Uber drivers, and frantically check to see what our own passenger rating is.

Heck, even your life insurance company is rated. But did you know they rate you, too?

You might not have realized it, but in the time between applying for a life insurance policy and when you start paying for it – you know, that period where you took a medical exam – the company rated you. This rating, or classification, plays a big role in how much your policy will cost over the next 20 or 30 years.

What are life insurance classifications?

Classifications are how an insurance company determines how much you’ll pay for your life insurance policy. They determine this during the underwriting process. You probably remember the underwriting process as the time when a nice nurse came to your home or workplace to give you a free physical and you wondered why this whole thing was taking longer than you would’ve liked.

But there was a lot going on behind the scenes during that time. The life insurance company was figuring out:

  • Your health status. That’s what that medical exam was for, and why you had to answer questions about your family health history and whether or not you smoke. The insurance company might have also requested an Attending Physician’s Statement (APS) from your doctor to get their point of view on your health history.

  • Your driving record. With a motor vehicle report, the insurance company can see if you act like Evel Knievel out on the roads.

  • Your hobbies. Some hobbies are more dangerous than others. If you scuba dive or charm snakes on the weekend and you told the insurance company (which you really should have), they took that into account.

With all of this information gathered, an underwriter will crunch some numbers and assign you a classification. If you aced everything, you’ll be assigned a Preferred Plus rating. That helps you secure the lowest premiums. If there are some marks against you – high blood pressure, you’re a gator-wrestler, etc – you’ll be dropped to lower classes like Preferred, Standard Plus, and Standard accordingly.

If you’re a smoker, you get your own special qualifications like Preferred Tobacco – you would normally be Preferred, but your smoking habits are worth a few strikes – and after that you’re assigned what’s called a "table rating," which will, in general, raise your rates incrementally by 25%.

Insurance companies use classifications to determine risk. Specifically, how risky you are for them to insure. More specifically, what are the chances that you’ll die over the course of your policy?

The simple reason for this is because a carrier needs to pay out the death benefit if you die. If you’re very unhealthy and more likely to die during the term of your policy, you’ll be charged more. If you’re very healthy, and there’s a low risk of the life insurance company having to pay the death benefit, you’ll get incredibly affordable rates.

For a more in-depth guide to classifications, read our full writeup here. For now, though, let’s take a look at a real example of the cost complications of different classifications.

A cost breakdown of life insurance classifications

The hows and whys behind life insurance classifications are helpful, but the real question is: How does this actually affect your life insurance rates?

Take Bill (Bill is fictional - you can call him whatever you want), a 35-year-old male with a $500,000/ 20-year term life insurance policy. Here’s what that policy would cost Bill from the best class (non-smoker Preferred Plus) all the way down to tobacco table ratings:

35-year-old male, $500,000/20-year term (Non-smoker)
Rating Monthly Premium Annual Premium
Preferred Plus Non Tobacco $23.41 $267.50
Preferred Non Tobacco $31.72 $362.50
Standard Plus Non Tobacco $40.47 $462.50
Standard Non Tobacco $49.22 $562.50
Standard Non Tobacco, Table 2 $71.10 $812.50
Standard Non Tobacco, Table 3 $82.03 $937.50
Standard Non Tobacco, Table 4 $92.97 $1,062.50
35-year-old male, $500,000/20-year term (Smoker)
Rating Monthly Premium Annual Premium
Preferred Tobacco $108.72 $1,242.50
Standard Tobacco $139.78 $1,597.50
Standard Tobacco, Table 2 $206.94 $2,365.00
Standard Tobacco, Table 3 $240.51 $2,748.75
Standard Tobacco, Table 4 $274.09 $3,132.50

You can see how all those lifestyle choices we discussed earlier reflect in the dollar breakdown. Falling from the best classification to the worst would make Bill’s policy more than ten times as expensive (and keep in mind that table ratings can go down even further. We stopped at Table 4, but you get the idea). Time to quit gator-wrestling, Bill!

That may not be a completely realistic take. It’s doubtful that the range of someone’s classification would span the entire rating spectrum – based on what you know about your own health and habits, you should have an idea of whether you’re closer to one end or the other – but there are still real cost considerations involved in smaller jumps. Just dropping from Preferred Plus to Standard Plus nearly doubles your premiums.

And look what smoking does to your rates! A Preferred classification sets Bill’s premiums at under $32 a month, but a Preferred Tobacco rating is almost $110.

Maybe those Truth ads highlighting the dangers of smoking should start using high life insurance rates in their campaigns?

How to get a better life insurance classification

Your life insurance classification is the final determinant in how much you’ll pay to protect your family. So how can you get a better rating?

  • Apply now. As a general rule of thumb, your life insurance rates increase every year you put off applying, by an average of 8-10% a year. If you apply now, you’ll probably save money by default.

  • Stop smoking. As you saw above, smoking is a surefire way to paying more for life insurance. If you stop smoking, you at least give yourself a chance for affordable rates. In our example, Bill can save $16 a month or $200 a year if he just goes from the best smoker class to the worst non-smoker class. He’ll save even more if he gets out of the table ratings.

  • Get healthier. Some of the health factors that affect your classification are out of your control – you can’t do much about your family health history – but there are some steps you can take. Losing weight, lowering your cholesterol, and lowering your blood pressure can all help you get a better classification. Even if you have a chronic illness, that doesn’t guarantee a higher rate; for conditions like diabetes, showing that you’re managing the disease and taking the proper steps and medication so it doesn’t get worse is viewed favorably by insurers, and many will work with you if this is the case.

One thing to note: Life insurance companies want to know that healthier living isn’t just a fluke, or that you’re not just trying to game the system for lower initial rates. When it comes to things like quitting smoking or losing weight, you usually have to show changes for a year or two before the insurer will give you lower rates.

Does this seem to go against our "apply now" tip? It sure does. But you have to think of everything in aggregate. Sure, your rates might go up by a relative 10% if you put off applying for a year, but you’ll probably save more than that with the non-tobacco rating you’ll get.

If you already have life insurance, are unhappy with what you’re paying, and want to see if you can get a better deal, it’s worth getting some free life insurance quotes and comparing to your current cost. If you’re healthier than you were when you bought you current policy, you could save yourself a lot of money over the next few decades.