What is a Rated Policy?
A rated policy is a life insurance policy issued to someone who the life insurance company has deemed to be high-risk. These policies cost more than average and might come with specific exclusions or limitations.
Life insurance and substandard ratings
Before issuing a life insurance policy to an applicant, the life insurance company underwrites them. That essentially means that someone from the life insurer’s staff evaluates the applicant’s risk level.
Most life insurance providers take the following into account:
The individual’s health, including their body mass index (BMI) and diagnosed conditions
Their personal and family health history
Their occupation and financials
Their driving record
Their use of tobacco, drugs, and alcohol
Based on factors like the above, the insurance company assigns the applicant a rating. People with preferred and preferred plus ratings are deemed lower-risk and get the lowest life insurance premiums. Most people get a standard rating, which means they pay policy premiums that are generally in line with the average.
If the underwriting process turns up too many items of concern, the insurance company deems the applicant substandard. That could mean they are in poor health, have a high-risk job like roofing or aviation, smoke, or have a driving history with lots of accidents, for example.
In some cases, the life insurance company will deny coverage to that individual. But if they decide they are willing to insure them, they issue a rated policy.
The rated policy also gets assigned a letter and/or a number. The insurance provider uses that designation to place the individual within a specific risk analysis table, which then sets the premiums for that policy.
Rated policy drawbacks
Rated policies generally cost significantly more than life insurance for standard or preferred-rated individuals.
Additionally, to mitigate the risk they take on in insuring an individual they’ve deemed substandard, the life insurance company may place limitations or exclusions on the policy. They may cap the death benefit well below a standard policy’s death benefit limit, for example.