Table ratings and flat extras on permanent policies: questions and answers

An offer that comes back "table 2" or "standard plus a flat extra" is a real offer with a higher price, and on a permanent policy the higher price touches more than the monthly bill. It can slow cash value growth, raise the premium needed to keep a universal life policy alive and change what a rider costs. The questions below come up most often after a rated offer arrives, and each answer sticks to how the contract and the underwriting process work. Every dollar figure is a hypothetical that we define for the arithmetic, not a price anyone will quote you.

If you need the basics of how surcharges are built, start with table ratings and flat extras explained, which explains the letters, the percentages and the usual reasons for each. This post assumes you have read it or already hold a rated offer, and it goes further into what the surcharge does inside a policy meant to last a lifetime.

What the surcharge is and how it is priced

What is a table rating, and why does it matter more on a permanent policy than on term?

A table rating is a percentage markup on the insurer's assumption about how likely you are to die in any given year. The base for that assumption is a mortality table, and a rating says your expected deaths run at, say, 150 percent of that table. Under one common convention, Table 2 means 150 percent, Table 4 means 200 percent, and each step adds 25 percentage points. Companies label the steps differently, so the dollar premium on your offer is the number to compare.

On a 20-year term policy the surcharge runs for 20 years and the policy ends. On a permanent policy the same surcharge can run for 40 or 50 years, and it is applied to a rising mortality cost. Mortality charges climb with age, so a fixed percentage of a larger number is a larger dollar amount every year. That is why a rating that looks tolerable at 40 can feel heavy at 70, and why the question of whether the rating can ever come off carries more weight on permanent coverage.

How does a table rating change a whole life premium?

On whole life the insurer sets a level premium at issue, built from three things: the cost of insuring you, the interest it expects to earn and its expenses. A table rating raises the first part. You pay a higher level premium, and in return the insurer is covering a higher expected claim cost across your lifetime.

Say a standard-class whole life policy of $250,000 for a 45-year-old carries an illustrative annual premium of $4,000. For a Table 2 rating the premium is not simply $6,000, because only the mortality portion is marked up, not the interest and expense portions. The result would be above $4,000 and below $6,000, and the exact figure depends on the company. The point of the example is the direction and the structure: the surcharge applies to one component of the price, so the total rises by less than the headline percentage on many designs. Do not assume this; ask for the actual rated premium and compare it with the standard one in writing.

Does a rating shrink my cash value?

It can, and the answer is in the policy ledger, not the sales conversation. A rated whole life policy has its own schedule of guaranteed cash values. Some companies design the schedule so that the extra premium goes to cover the extra mortality cost, which leaves less available to build cash value than a standard-class buyer would have after paying the same total premium. Other designs hold the cash value schedule close to the standard one and simply charge more.

You cannot tell which from the rating label. Ask for two ledgers, one at the standard rating and one at the rated premium, for the same face amount, and compare guaranteed cash value at years 10, 20 and 30. The gap between them is the lasting cost of the rating in dollars of accumulation. If the insurer will only produce the rated ledger, ask why, and ask how the surcharge is treated inside the guarantees.

How does a table rating work inside universal life?

Universal life separates the pieces that whole life bundles. Each month the insurer deducts a cost of insurance charge, calculated from a rate per $1,000 of the net amount at risk, plus expense charges, from the policy's account value. A rating is commonly applied as a multiple of the cost-of-insurance rate. A Table 4 rating, 200 percent, means the monthly mortality charge is roughly double what a standard-class owner of the same age would pay.

Here is the arithmetic with invented rates. Say at age 55 the standard monthly charge is $60 on a particular policy. At Table 4 it becomes $120, an extra $60 a month or $720 a year. If the owner pays the same premium as the standard-class illustration, the extra $720 a year comes out of the account value, so the account grows more slowly and may stop growing altogether. To hold the policy on the same track, the rated owner has to pay more, and the extra required grows as the rate rises with age. See how universal life insurance works for the base mechanics.

What does that mean for the risk of the policy lapsing?

It raises it, which is the single most important thing to understand about rated universal life. A universal policy lapses when the account value cannot cover the monthly deductions. A rated policy has larger deductions, so any shortfall in premium or crediting shows up sooner and does more damage.

A sound way to look at it is the in-force illustration. When you buy, ask for the illustration at the rated class, not a standard-class one, and have it run at the guaranteed assumptions, not only the current ones. If the policy only stays in force to age 95 under current assumptions and lapses at 82 under guaranteed ones, you are relying on the insurer's current crediting rate and current cost-of-insurance rates holding up for decades. A policy with a no-lapse guarantees on universal life: how they work changes that picture, but the rating usually raises the premium needed to qualify for the guarantee. Ask for the required premium at your rating.

What about indexed and variable universal life?

The same cost-of-insurance logic applies, because both are universal life designs with a monthly mortality charge. The rating raises the charge. The rest of the policy, how interest is credited from an index or how subaccounts perform, is separate. In an indexed policy a good index year can mask a heavier mortality charge, and a poor one exposes it. In a variable policy the account value moves with the market, so a rated owner in a down market can see the charge consume a larger share of a smaller balance.

For these products the in-force illustration at a lower assumed return is the useful stress test. Ask for it at the rating you hold, and read the explanation of how the maximum illustrated rate was set. This is where a rated applicant is most likely to be sold a policy that works in the sales illustration and fails in a mediocre decade.

What is a flat extra, and how is it charged on a permanent policy?

A flat extra is a fixed charge per $1,000 of death benefit per year, added for a specific hazard such as aviation, a hazardous job or a recent medical event. It does not rise with your age the way a percentage rating does. Say an insurer adds a flat extra of $5 per $1,000 for five years on a $250,000 policy. The arithmetic is 250 units of $1,000 times $5, which is $1,250 a year, or about $104 a month, for five years.

On whole life the flat extra is added to the premium bill. On universal life it is usually deducted monthly from the account value alongside the other charges, which means that if the policy was funded at the standard-class level, the flat extra eats into the account value for those five years. After it ends the charge stops, and the rated owner is back to the base premium. Ask whether the offer states the end date in the policy itself and whether the extra can be removed early if the hazard goes away, for example if you stop flying. A written end date is stronger than a verbal promise from an agent.

Guarantees, dividends and riders

Do the guarantees in the contract change if I am rated?

The guarantees are different numbers but the same kind of promise. A rated whole life policy has guaranteed cash values and a guaranteed death benefit, just at a higher premium and on its own schedule. A rated guaranteed universal life policy has a guaranteed coverage duration that is tied to the rated premium. The risk is not that the guarantee disappears. The risk is that you compare a standard-class illustration with a rated policy and think the guarantees match.

Look at the section of the policy that lists guaranteed values and the section that lists the rate class. Confirm that the rate class on the contract matches the offer, because the class sets the guaranteed maximum charges. See guaranteed vs non-guaranteed values in a policy illustration for how to separate the contractual numbers from the projected ones in any illustration.

Do dividends change on a rated participating policy?

That depends on the company, and it is a reasonable question to put to the insurer in writing. A participating policy shares in the company's surplus through a dividend that reflects interest, mortality and expense results. Companies describe how they apply the dividend formula to different classes, and some treat rated policies as their own class, while others apply the same scale with an adjustment. No company can promise a dividend, and a rated policy may pay one that is lower or higher than a standard one for reasons specific to its design.

The practical step is to ask for the illustration of a rated policy at the current dividend scale and again at a lower one, and to treat both as projections. Do not infer the dividend from the standard-class illustration a friend received.

What happens to riders on a rated policy?

Riders often follow their own rules. A waiver of premium rider, which pays the premium if you become disabled, is priced off the base premium, so a higher base means a higher rider charge. Some insurers decline the rider for rated applicants whose rating comes from a condition related to disability. Other riders, such as a child term rider or an accelerated death benefit rider, may be offered at standard terms or declined.

When the offer lists a rider, ask whether it carries the same rating as the base policy, a different one or no surcharge. Then ask what the offer would look like without the rider, because a rider you cannot use is a cost without a benefit.

Reconsideration, shopping and walking away

Can the rating be reduced or removed later?

Sometimes. Some insurers review a rating after a stated period of stable or improved health, and a few state the review right in the contract or the offer letter. Others will consider a request only on the evidence you supply, such as a year or two of normal lab values after a cardiac event, or a doctor's letter showing a condition has resolved. A rating tied to a flat extra for a hobby or job can often come off when the activity ends.

A request is not a promise. The insurer decides, it may ask for a new medical exam and records, and it may deny the request without penalty. Ask three things before you accept a rated offer: whether reconsideration is available at all, after what period, and what evidence it would want. The process is described in asking for a better rate class later. Keep a folder of your medical records from the date of the offer, because the strongest case rests on dated documents.

How should I shop when I know I will be rated?

Underwriting guidelines differ widely from company to company. A condition that earns Table 4 at one insurer may be standard at another that specializes in it, and a company that rates you heavily on a permanent policy may rate you lightly on term, or the reverse. An independent agent or broker can submit your history to several insurers informally, before a formal application, to see where it lands. Ask whether the inquiry is anonymous and whether it will appear in your file, because a formal application, even one that is later withdrawn, can be reported to the MIB.

Compare offers on three lines: the dollar premium at the rating, the guaranteed values or guaranteed duration at that premium, and the reconsideration terms. A lower table rating with weak guarantees is not obviously better than a higher rating with strong ones. Our which type of life insurance fits me? helps frame which permanent design suits the goal you have in mind.

When does a rated permanent policy stop making sense?

It stops making sense when the premium needed to keep the guarantees is out of reach, or when the purpose could be met more cheaply another way. A permanent policy is justified by a need that lasts as long as you do: a dependent who will always need support, an estate with illiquid assets, a spouse who relies on your pension. If the need is temporary, a rated term policy costs less and avoids carrying a surcharge for decades.

A second warning sign is a rated universal life policy whose illustration only works at the highest allowed crediting assumption. That is a policy that can fail quietly, and the rating makes it fail sooner. Read the guaranteed column first. If it shows a lapse in your seventies, you are buying a gamble on future rates, not a lifetime guarantee.

Before you accept an offer

What should I ask the insurer to put in writing before I accept?

A short list is enough, and each item closes a gap that tends to open later.

1. The rate class on the contract and the percentage or table it represents.
2. The premium at that class, and the guaranteed cash values or guaranteed duration at that premium.
3. Whether any flat extra applies, for how many years, and whether it can be removed early.
4. How the rating affects each rider you want.
5. Whether and when the rating is reviewable, and what evidence would be needed.
6. Whether the rating carries over if you later convert, reduce or exchange the policy.

If the answers arrive only by phone, ask for an email that summarizes them. A rating that is documented can be argued about; one that exists only in a call cannot.

Key takeaways

• A table rating raises the mortality charge, so on permanent coverage it can lift the premium for decades and slow cash value growth, depending on how the contract schedules the extra cost.
• In universal life the rating usually multiplies the monthly cost-of-insurance charge, which makes a lapse more likely; test the rated policy at guaranteed assumptions before relying on current ones.
• A flat extra is a fixed dollar charge per $1,000 and often ends on a date, so get the end date and any early-removal rule in writing.
• Dividends, riders and guarantees on a rated policy follow company-specific rules; ask for the rated illustration and ledger, never a standard-class one.
• Rated applicants gain the most from comparing several insurers, and from asking early whether and when the rating can be reconsidered.