“As time passes, there is an increasing risk of further health issues arising”
Jonathan Morris, protection specialist at John Lamb Hill Oldridge, examines the considerations of increased premiums known as ‘rated quotes’ and the risks associated for clients in waiting to be offered standard rates when applying for cover.
When an applicant is told by an insurance company that they are not in perfect health, it can be a difficult message to hear. This is especially true, where the medical underwriting process has discovered an issue that the applicant was not previously aware of.
Often people’s first reaction is to question whether the life offices are simply trying to squeeze them for more money, since medical issues tend to result in increased premiums. These increased premiums are known as ‘rated quotes’.
The standard insurance price (also known as the standard rate or ordinary rate) quoted by insurers assumes no additional risk factors compared to the underlying pricing of the contract.
Underwriters and actuaries work together to calculate appropriate ratings to apply for underlying health conditions based on mortality data (from clinical studies as well as the insurers & reinsurers claims experience). Ratings can also be applied due to participation in certain hazardous pastimes or travel to higher-risk areas in the world.
Because underwriting approaches have to complement the underlying pricing of the contract, some insurers may charge a higher standard rate but apply less in the way of ratings (also known as loadings) for health or other disclosures, whilst others may have very keen pricing for standard risks but apply larger increases for non-standard cases.
Ultimately, without an in-depth knowledge of the varying underwriting philosophies in the market, clients with medical considerations can find themselves being charged more than necessary. This is because they often chose the cheapest base premium without knowing that that particular insurer will go on to apply a heavy rating.
Market knowledge allows you to identify where there may be a higher base premium available, but with an insurer who will go on to apply a more favourable medical rating, thus giving a cheaper premium overall.
Why would you take a rated quote?
Ratings will often be applied to insurance premiums where issues are uncovered during the insurance medical. These may have been known to the client, or they could represent underlying issues that the client was not aware of. In the latter instance, where a client may have no discernible physical symptoms, the increased premium offered can be hard to stomach.
However, in each case the underlying issues do ultimately mean that there is an increased risk for the insurer and the premiums are recalculated accordingly.
Clients typically prefer to be given standard rates and therefore, they may wish to delay accepting cover until either their underlying health conditions have been checked by a doctor or until they have fully recovered to a level where they would achieve standard rates.
However, this can often take a long time, in some cases even a number of years, during which time the client is exposed to four further risks:
During this extended period, the client will ultimately not have any protection in place for vital areas of financial security, including potential loss of income, family protection and inheritance tax planning.
- Further health issues developing during the period of delay
As time passes, there is an increasing risk of further health issues arising. This is especially true for those who already have underlying health conditions. If an individual suffers additional health problems after they have declined their rated quote, they may find it more difficult to obtain cover in the future and could even incur a higher rating than before, or even a declinature.
- The condition you were previously rated for worsens
While the client waits for a medical condition to potentially improve, they are at risk of the issue itself becoming more severe. This would ultimately lead to the rating being increased, but more importantly there may even be the risk of death in the intervening period before cover is in place.
In addition to the increasing health risks associated with delay, premium base rates will also continue to rise in line with age at application. If the client is unable to achieve the standard rates they were aiming for, the base premium will now be even higher too.
Those who choose to delay putting cover in place in an attempt to achieve standard rates in the future, run the risk of the effect of any reduced loading being cancelled out by their increased age at the time of the later application anyway.
As a result of the combined risks involved with the cost of delay, the possibility of future issues arising and most importantly the lack of current protection, at John Lamb Hill Oldridge, we will always advise our clients to accept a rated quote and rebroke the cover at a later date if it looks like more favourable premiums can be obtained.
Our priority is always to protect the client in the most cost-effective manner.
Article written by Jonathan Morris, Protection Specialist at John Lamb Hill Oldridge, published in COVER Magazine (19th December 2022).