Underwriting and Risk Classification
John, age 50, applies for a $1,000,000 20-year term life policy. During underwriting, the insurer discovers that John has a history of elevated liver enzymes (ALT 80 U/L, AST 70 U/L) and is overweight (BMI 32). He also has a family history of heart disease (father died of MI at 55). John's current blood pressure is 140/90. The insurer's underwriting guidelines classify him as substandard due to these factors. The insurer offers him a policy with a table rating of 2 (25% higher mortality), which increases the premium by 50%. John is shocked and considers not taking the policy. He has a wife and two children and needs the coverage.
1. Explain why the insurer rated John substandard and what options he has.
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The insurer rated John substandard because of multiple risk factors: elevated liver enzymes (possible fatty liver disease), obesity (BMI 32), family history of premature heart disease, and borderline high blood pressure. These factors increase mortality risk. The table rating of 2 means the insurer estimates mortality is 125% of standard, so the premium is increased by 50% (since each table typically adds 25% mortality, but premium increase may be 25% per table? Actually, table ratings usually add 25% to mortality, but premium increase is often 25% per table of the base premium. However, the problem states 50% increase, so it's consistent with 2 tables at 25% each). John's options: accept the rated policy, shop with other insurers who may have more lenient underwriting, improve his health (lose weight, control BP, lower liver enzymes) and reapply later, or consider a smaller face amount. He should not go without coverage given his family obligations.
2. What is the impact of the rating on John's premium and long-term cost?
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The rating increases his premium by 50%. If the standard premium for a $1,000,000 20-year term for a 50-year-old male is, say, $2,000 per year, his premium would be $3,000 per year. Over 20 years, that's an extra $20,000. However, term insurance is temporary, and the rating only applies during the term. If he improves his health, he could reapply for a standard policy later and replace this one. But he must weigh the cost against the need for coverage. The rating also indicates higher risk, so he should address the underlying health issues regardless.