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Ordinary rates for limited types of life insurance policy for under-average lives
If the life insurance policy expires before a certain age, e.g. term insurance, then certain under-average lives can be accepted at ordinary rates. The extra exposure risk may be unlikely to become critical until after the policy has expired.
Exclusions
The life policy is accepted at ordinary rates, but death from the extra risk is excluded. The exclusion has cancelled out the reason for the extra risk premium. For example if the extra risk was motor cycling and death from that cause was excluded then the policy may be accepted at ordinary rates.
The complication with this method is that the policy may then no longer provide the proposer with the cover they really need.
Increased premium
Premiums are charged by life insurance offices to cover the risk. If the under-average life presents an increased risk then charging an increased premium presents a possible solution. This might be shown as an increase in the premium rate per £1,000 of life insurance brought or if the extra risk can be quantified then an extra £1 premium for every x miles flown in a private plane.
Rating up
Similar to the method described above but the calculation for arriving at the premium is different. If the extra risk indicates that the life insured might die at an earlier than average age, then the premium can be rated up. For instance if the extra risk might reduce life expectancy by five years and the proposer was 35 years old, then they could be charged the premium which would be charged if they were five years older e.g. 40 years of age.
Debts
If the proposer is unhappy with paying an extra premium an alternative is to place a debt on the sum insured. In this case the debt is applied to the sum insured which effectively reduces the amount of sum insured paid. Less sum insured for the same premium. In some cases this debt can be reduced as time passes by. This may be suitable with a decreasing extra risk exposure. The debt might be as much as 90% of the sum insured in the first year, but reduce by 9% per year until in year ten it has reduced to zero.
If everything proceeds well the proposer in ten years goes back to his full sum insured and has paid the ordinary rate premium, whilst the life office has been protected in the earlier years when the risk was at its height.
This might work well where the extra risk is decreasing or where the life insurance part of the cover is less important to the proposer.
Postponement
This can work where the risk is heaviest at the outset making the life almost uninsurable, but that once the life insured has survived a certain period of time, there is every reason to believe that the main risk will have reduced or passed. The proposal is postponed and resubmitted at a future point in time. This might be the case where the life insured is about to under go a serious operation.
Declinature
Some extra risks are too heavy for the life office to carry irrespective of the premium rate charged. If the risk is unlikely to improve then the life office may have no alternative other than to decline the risk.
As a general rules life offices are loath to decline the risk and will try to offer special terms. However life offices do have a duty to their shareholders and the other lives protected by the life fund and who may have a share in the profits of that life fund.
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Disability Discrimination Act 1995