After reviewing the application and medical evidence, the underwriter assigns the applicant to a risk class that determines the premium rate.
Standard risk: the applicant's expected mortality is consistent with the insurer's standard table. Standard rates apply.
Preferred risk: the applicant's health history and lifestyle present better-than-average mortality prospects. Preferred rates (lower premiums) apply. Preferred class typically requires non-tobacco use, no significant medical history, healthy height/weight ratio, and favourable lab results.
Substandard (rated) risk: the applicant has a health condition, hazardous occupation, or lifestyle factor that increases expected mortality above standard. The insurer may:
- Apply a flat extra premium (a fixed dollar amount added per $1,000 of coverage per year, typically used for time-limited or short-term hazards).
- Apply a table rating (a percentage increase above the standard premium, expressed as a table number; e.g., Table 2 = 150% of standard).
- Exclude a specific cause of death by exclusion rider (e.g., aviation exclusion for a private pilot).
Declined (not insurable): the risk is too high for the insurer to accept at any price. The applicant may seek insurance through the Canadian Life and Health Insurance Association (CLHIA) market for declined applicants or through government programs, or may consider group coverage which does not require individual underwriting up to the non-evidence limit.
Common mistake: confusing "rated" with "declined." A rated policy is still issued; only the premium is higher. A declined application results in no policy.
Recall: What two mechanisms does an insurer use to price a substandard risk? What option remains for an applicant who is declined?