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Merritt Personal Lines Manual: Classifying Your Client as a Risk

Once all of the underwriting information is gathered, the underwriter will classify your client as a preferred, standard or substandard risk. If he is a standard risk, he will pay the standard rate -- or premium -- for the policy. Preferred risks are entitled to premium discounts, while substandard risks may be declined or they may have to pay an extra premium for the policy or have a policy issued with a rider omitting some element of the coverage.

To determine the risk classification, the underwriter is concerned with the following factors:

  • past medical history and current physical condition;
  • age and sex of the applicant;
  • occupation (if still working) and avocations;
  • morals; and
  • pre-existing conditions.

If your client is considered a substandard risk, the insurance company may charge an additional premium to cover the additional risk. Or the company could add exclusion riders, reduce the benefit amount, increase the elimination period or reduce the benefit period.

Adding riders that exclude a particular condition from coverage is not a common technique for LTC policies -- reducing the benefit amounts is.

For example, Marie applies for an LTC policy with a daily benefit amount of $150, following a 30-day elimination period. Benefits are payable for up to five years. Marie indicates on the application that she has several medical problems -- high blood pressure, arthritis, borderline diabetes and hardening of the arteries.

Marie's medical history presents underwriting problems. Therefore, the insurance company may choose to limit the daily benefit for this impaired risk. For example, the underwriter may approve the policy issue, but only for $50 per day in benefits. In essence, the policy is reduced from a total benefit of $273,750 (five years x $150 per day) to $91,250 (five years x $50 per day).

Or the insurance company may choose to increase the elimination period from 30 days to 90 or 100 days. Increasing the EP will have the effect of eliminating some of the smaller claims.

Or the underwriter could approve the policy with a shorter benefit period to reduce the dollar amount of the potential loss to the insurance company. Reducing the benefit period from five years to one year would result in Marie receiving a maximum benefit of $150 x 365 days or $54,750.

Or the underwriter could employ all of these devices. For example, the insurance company could issue a policy with a reduced benefit amount (for example, $50 per day), plus a reduced benefit period of three years and an increased elimination period of 90 days. If this were done, Marie would be issued a policy with a potential maximum benefit of $54,750, payable after a 90-day EP.

Another tool insurance companies use to reduce claims paid is the so-called gatekeeper mechanism. One such device is a policy provision which stipulates that any confinement to a nursing home must be preceded by a hospital stay -- typically, at least a three-day prior hospitalization due to accident or sickness. Further, the provision will state that admission to a nursing home must occur within 30 days of discharge from the hospital. This provision should reduce the number of potential claims, plus admission to a nursing home for purely custodial care normally would not be covered.

Another policy provision that may serve to reduce potential claims is the use of a probationary period. A probationary period is a waiting period for sickness benefits. The policy may state that no benefits will be paid until the policy has been in force for three months, six months, etc.

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