Determination and handling of Under average/ Substandard Lives in Life Insurance

Through the Process of Underwriting, a series of tasks designed to:

1. Gather adequate information on proposed insured
2. Evaluate the information
3. Make underwriting decision i.e.
   • Classify into Standard or Substandard Life
   • Issue insurance as applied for if standard
   • Issue insurance with certain modifications in coverage or premium rate if substandard or
   • Decline to issue insurance

In other words; it is Risk Selection

How to treat Substandard Lives

Charge ordinary rates for Special type of policies:

• Applied for increasing extra risk which becomes more critical in later years.
• Charge ordinary rates provided the policy matures before a certain age. E.g. Endowment Policy maturing before the age of 65 years

Offer a different type of Policy:

A Whole life proposal might be declined but an endowment policy maturing at ages fifty or fifty five may be offered

Exclusion

• May be accepted at ordinary rate but death from the extra risk is excluded. E.g. death resulting from a pastime
• Used for constant extra risks – occupational and sporting extra risks
• Disadvantage: Incomplete cover and not available when it is needed most.

Monetary Extra:

An extra premium expressed in terms of an amount per 1,000 Sum Assured. E.g. 2.00%0 (2 per mille) i.e. MuR2 per MuR 1,000 sum assured.

Rating-Up

• Assumes that the life is “X” years older than the real age
• The premium for the rated-up age is charged. E.g. a proposed aged 40 with chronic bronchitis rated “plus 5” can be charged the normal premium for a 45 year old man

Debt or Lien

1. This is deduction from the sum assured by certain percentage per annum
2. E.g. if death occurs in the first year of assurance the sum assured is reduced by a debt of 90%. The debt decreases by say 10% per annum for ten years.
3. If death occurs after ten years, the sum assured will be paid in full

Postponement

• Used where the initial risk is virtually uninsurable, but where after the danger period is survived the prospect will improve substantially so that acceptance at ordinary rates might be possible.
  • E.g. if the proposer is to undergo surgery in the near future.
  • It can also be used for a pregnant woman proposer who has had history of gynaecological issues

Decline: The proposal may be declined outright where

• The extra risk is very heavy with no prospect of improvement later
• A medical examination revealed that a proposer is HIV positive. This may not be the case for group schemes and where the country’s law protects HIV victims.