Do you ever find it weird how things seemed to be allot easier “back in the day”? Deals were made on a hand shake, fortunes were made on the golf course and life insurance was much easier to get. Well those days are over. In the past, life insurance underwriting was more forgiving – sometimes borderline cases would get insurance (which was great for them!).
Today, life insurance and health insurance is strictly underwritten (except for mortgage insurance through the banks) because the insurance company has to ensure they make money off of their products – Sorry folks, profit is the name of the game and that is in your best interest!
So how does an insurance company come up with a the premiums that they are going to charge you? Easy! (well there is a complex table and formulas but for my article- I will make it simple)
Let’s look at it from a money standpoint. Finance people have a rule called the Rule of 72. This rule tells us that our money, invested at an interest rate of 7.2% would double itself every 10 years.
That being said – let’s transpose that to the life and health insurance. If you are buying a life insurance policy as a regular risk (someone relatively healthy that is probably expected to live to a ripe old age – average being 85), the insurance company can expect to collect enough in interest payments on the premiums to ensure they can pay out any claims and turn a profit (or at very least pay the bills).
If a person is not a standard risk – meaning that they have weight or other health related issues, the standard rates could not apply and usually, the standard life expectancy will not apply either.
In order for the insurance company to realize a break-even or profit in the non-standard client policies a “rating” is created. The rating is basically a surcharge on top of the premiums that a person pays in order to return that Rule of 72 back into balance.
For example, I often find that a smoker’s rates are nearly double that of a non-smoker. People can speak of their right to smoke etc, but there is documented proof that people who smoke tend to live shorter lives. The proof is in the “pudding”.
The insurance industry is a business, it must realize profits by law so that it can have the funds to pay it’s policy holders the coverage that they are buying, the staff to run the show and the agents that sell the products. Insurance companies also offer you huge tax saving deals like sheltered insurance accounts (a discussion for a later date).
So does this mean that you shouldn’t apply for the coverage to avoid a rejection – NO! In fact, you should apply to see if you are made an offer. If not, your broker will find another solution for you. With the advent of exclusions and ratings, alternate insurance strategies etc, insurance products can be found for many people – at the right price.