How to Insure Your Income: Standard and Substandard Risks

Once all the underwriting information has been reviewed, an insurance company makes a decision about the acceptance of the risk.

Most applicants are classified as standard risks, which basically means they fit the profile of an average policyholder. In these cases, a policy will be issued as applied for by the applicant. The rate or premium charged will be the standard premium relative to the person's age, sex and occupation -- as well as the benefit amount, elimination period and benefit period selected.

Occasionally, an applicant for disability income will be classified as a substandard risk. This usually will result from a problem with one or more of the underwriting factors we have considered in this chapter -- such as a past or current medical problem or evidence of a moral hazard.

One point mentioned before bears repeating: The factors that impact disability insurance coverage are different from the factors that might influence life insurance or other coverages. If an applicant has a history of back problems, he or she might have no trouble getting life insurance -- but a lot of trouble getting disability. A person usually won't die due to a backache, but certainly could become disabled because of one.

If you are classified as a substandard disability risk, an insurance company has several alternatives available for issuing a special policy:

• An extra premium may be charged, whereby the coverage is issued as applied for and the higher premium is used to compensate for the higher risk involved.
• A rider may be attached to the policy, modifying the coverage (a full exclusion rider is used when the nature of the condition is likely to result in recurrent disabilities -- for example, a full back exclusion rider may be used for chronic back disorders).
• A qualified condition exclusion rider may be used to exclude coverage for a specified medical problem for a specified period of time.
• In a similar vein, the company may change the elimination or benefit period for disabilities related to a particular medical condition.
• Or the insurance may increase the elimination period or shorten the benefit period for the whole policy to compensate for the medical disorder.

Example: Ellen has a problem with ulcers. She applies for disability income protection with a 30-day elimination period and a to-age-65 benefit period. Due to the nature of the disorder, her insurance company decides to issue Ellen a policy with a 180-day elimination period and a five-year benefit period.

Of course, a final alternative available to the underwriter and the insurance company is simply to deny coverage due to the medical condition.