When insurance companies review applications, they must decide how risky it is to insure each person. Companies base risk assessments on underwriting.
Underwriting is a series of health guidelines companies use to determine risk. Generally, they base risk on a few factors, including:
- How likely is the applicant to need care in the near future compared to the average
- The applicant's current health and health history
- Family health history
If you’re curious, you can learn more about what underwriting is and how the underwriting process works with our FAQ article.
At the end of the analysis, the company assigns the applicant a rate class. Rate classes impact an individual's policy costs and how many benefits they're eligible for. Generally, there are three rate class categories: preferred, standard, and substandard. Some companies may add a second tier for substandard rates.
A preferred rate class is for those who pose the lowest risk to companies. Applicants in this rate class typically have a discounted or lower premium.
A majority of applicants qualify for the standard rate class. These individuals pay an average rate, usually without any discounts.
A sub-standard rate class is for those who are riskiest to insure. Individuals in this class often pay more for coverage and may have limited benefit options.
Some insurance companies may refer to these rate classes by different names. Other companies may only offer one or two of the three rate classes. Regardless, all insurance companies assign applicants a rate class during underwriting.