The Insurance Buying Guide: Standard and Substandard Risks

Once all the 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 that 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 results from a problem with one or more of the factors we have considered -- 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 than the factors that might influence life insurance or other coverages. If you have a history of back problems, you might have no trouble getting life insurance -- but a lot of trouble getting disability insurance. You won't usually die due to a backache, but you 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 people with 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;
• the company may change the elimination or benefit period for disabilities related to a particular medical condition, (example, Larry has a disability income policy with a 30-day elimi-nation period -- and a rider that calls for a 90-day elimination period for any disability due to a gall bladder disorder. The insurance company will cover a disability due to gall stones, but no benefits would be paid until after 90 days);
• the insurance company 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 and applies for disability income protection with a 30day 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 insurance company is simply to deny coverage.