Editor's Note: This article is a guest post from Amy Danise, Senior Managing Editor of Insure.com. It is the fourth in a four-part series on financial literacy.
If you're healthy, you'll likely receive good life insurance quotes for your age and sail through the buying process.
But life insurance shoppers with a less-than-ideal medical history should have a good understanding of "underwriting."
Simply put, underwriting is the process by which life insurance companies decides how much to charge you. Underwriters use sophisticated tables to determine your life insurance policy price. They factor in age, life expectancy, height, weight, and health conditions, among other factors that aren't health-related, such as dangerous occupations and bankruptcies.
If you've been told that your life insurance policy will be priced using one of the terms below, here's what it means.
Flat rating (also called temporary flat extra): This means you'll have to pay a specified amount above the base premium for a certain period of time, which will be defined in the policy. People who are asked to pay flat extras usually have a short-term health risk that will disappear. For example, maybe you've just had surgery, so the insurer wants you to pay for the extra risk during your recovery. Once the flat rating period is over, your bill drops down to the base premium.
Table rating: This means you're not uninsurable, but you were close. The insurance company is willing to accept you, but you present such a high risk that it will charge you an amount higher than a person who falls in the "standard" class.
Coverage for this higher risk comes at a higher premium, and this cost doesn't go away: If you want the insurance, you'll need to pay the table rating for as long as you hold the policy.
Table ratings are used for customers with chronic health conditions, such as certain types of diabetes.
Debits and credits: These pluses and minuses within life insurance pricing could help you out--or not. Underwriters often apply "debits" for health problems (that raise your rate) and "credits" for health victories (that lower your rate).
This method benefits you if you have a condition that leads to a higher price, yet you have advantages that can offset it. For example, say you are overweight but are physically fit, or you have a good cholesterol level. Your insurer might give you "credit" for these.
If you disagree with a table rating, ask your agent to come to your aid. Your insurance company may reevaluate its decision if you supply additional medical test results that prove your health is better than the insurer thought.
Remember, each insurance company has its own underwriting process. You will not receive two identical quotes from different insurers. If you've received a life insurance quote that includes a table rating or a flat extra, don't assume that every insurer will make the same judgment. No matter what your health, it's important to shop around.
Insure.com has more details on how life insurance companies view you: underwriting categories.