Life Insurance Coverage By Having An Impaired Risk

What is impaired risk in life insurance?

Life insurance can be one of the most important types of policies you ever buy, but qualifying for coverage can be a difficult process, especially if you're not the picture of good health. When you buy life insurance, the carrier takes on a legal obligation to pay a large sum of money to your beneficiaries if you die within the scope of the contract. Carriers often require extensive investigations and analysis before agreeing to provide coverage to determine the level of financial risk you pose and whether that potential liability is within acceptable limits. If the insurance company's underwriters believe that your health or other relevant personal status would result in additional financial liability to the carrier, you are considered an "impaired risk." By understanding the common criteria for identifying an impaired risk and how insurers handle those applications, your life insurance investigation will be more efficient and less confusing.

Definition

The life insurance industry defines an "impaired risk" as someone who presents a statistically greater probability of dying before the company can collect enough premiums to pay beneficiaries, without losing money. Most impaired risk classifications are made based on the medical status of the applicant, in which a condition or combination of conditions creates a significantly increased likelihood of death occurring before natural life expectancy has been reached. However, not all impaired risk applicants are classified as such due to medical status; certain hobbies, jobs and other personal histories can result in an impaired risk determination regardless of the quality of the applicant's health.

Identification

An application for life insurance usually contains a long series of questions related to health status and medical history, as well as personal habits and occupational analysis. Along with an evaluation of the questionnaire responses, the carrier will typically require a brief physical examination to verify the information provided in the application and check for risk factors that may be unknown to you. Blood and urine are collected during the exam and tested at a laboratory for the presence of nicotine, illegal drugs, prescription medications and HIV/AIDS and to measure levels of common chemical and biological substances that may indicate health problems. Insurance companies also will obtain criminal background and motor vehicle history reports to look for undisclosed accidents, traffic violations and illegal activity that provides additional insight into your risk profile.

Types

Impaired risk classifications are usually the result of unfavorable medical history that the company believes presents too great of a risk to insure. Common medical history and conditions that cause impaired risk with life insurance are HIV or AIDS, diabetes, extreme obesity, heart attacks or strokes, cancer and uncontrolled blood pressure. Common non-medical issues that result in impaired risk classification are felony criminal convictions, illegal drug use, excessive motor vehicle violations and a family history of deaths caused by heart disease or cancer. Other reasons for an impaired risk determination may be unrelated to health status or the presence of a risky behavioral past and include occupations and hobbies that present an increased possibility of death. Examples include being a pilot, automobile racing, skydiving, hang gliding, bungee jumping, spelunking and any other job or hobby that moves extremely fast or is very high above the ground.

Results

When a carrier determines an impaired risk exists, one of two decisions will be made regarding the application for life insurance. The policy will be issued at a higher premium to offset the additional financial risk posed by the increased chance of death, or the application will be denied entirely. Policies issued for impaired risk are called "rated" policies, and the increased premiums reflect a percentage of the ordinary cost. The percentage increase of a rated policy is determined by how much additional risk the policy will present and is given in terms of a "table" rating that illustrates this level.

Alternatives

If your life insurance application is returned with an impaired risk classification or denied entirely, your options are limited if you still want to buy coverage. You can simply pay the increased premium or apply for life insurance with another carrier. However, by signing a life insurance application you authorize the carrier to share their underwriting decision with the Medical Information Bureau, which is an independent organization that holds data and shares applicant information with other carriers to prevent fraud. If one insurance company classified you as an impaired risk, it is highly likely that another also will do so. Other alternatives are to find a carrier that specializes in insuring impaired risks or find one that does not require medical evaluations and risk questionnaires, called a "guaranteed issue" company. This last option is the least beneficial because guaranteed issue insurance policies are only requested by people who cannot otherwise obtain life insurance, and premiums can be extremely high.

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