What is Preferred Risk? Everything You Need to Know

Preferred risk is a classification used by insurance companies to categorize individuals who present a lower-than-average risk of loss. These individuals typically qualify for the most favorable insurance rates.

In this guide, you'll learn:

The factors that determine preferred risk status.
How preferred risk classifications impact different types of insurance.
The benefits of being classified as a preferred risk.
How to potentially qualify for preferred risk rates.

Factors Determining Preferred Risk

Insurers consider various factors to determine if an individual qualifies for preferred risk status:

Health and Lifestyle

Excellent Health: Individuals with no significant health issues, chronic conditions, or family history of serious diseases.

Healthy Lifestyle: Non-smokers, healthy weight, regular exercise, and no history of substance abuse.

Financial Stability

Stable Income: Consistent employment and income.

Good Credit History: A strong credit score and responsible financial behavior.

Driving Record

Clean Driving Record: No accidents, violations, or moving violations.

Impact on Different Insurance Types

Preferred risk classifications affect various types of insurance:

Life Insurance

Preferred risk policies offer the lowest premiums for life insurance coverage.
Insurers may have different tiers of preferred risk, such as "preferred best" or "preferred select."

Health Insurance

While health insurance is now largely governed by the Affordable Care Act (ACA), which limits risk-based pricing, healthy individuals may still find more favorable rates or plan options.

Auto Insurance

Preferred drivers with clean records and low-risk profiles receive the lowest auto insurance premiums.

Benefits of Preferred Risk Classification

Being classified as a preferred risk offers significant benefits:

Lower Premiums

Preferred risk individuals pay less for insurance coverage.
This can result in substantial savings over the life of a policy.

Better Coverage Options

In some cases, preferred risk status may qualify individuals for more comprehensive coverage or additional benefits.

Qualifying for Preferred Risk

While you can't change some factors, you can take steps to improve your chances of qualifying:

Maintain a Healthy Lifestyle

Quit smoking, maintain a healthy weight, and exercise regularly.

Improve Your Financial Health

Pay bills on time, manage debt, and improve your credit score.

Drive Safely

Avoid accidents, traffic violations, and moving violations.

Conclusion

Preferred risk classification offers significant advantages in the form of lower premiums and potentially better coverage.

Understanding the factors that determine preferred risk and taking steps to improve your profile can help you secure the most favorable insurance rates.

For more insight into how this concept interacts with others, see our detailed guide on Insurance Underwriting, which further explores the process insurers use to assess risk and its implications in greater depth.

Preferred Risk FAQs

What is an example of a preferred risk?

An example of a preferred risk individual for life insurance would be:

A healthy 40-year-old non-smoker who maintains a healthy weight, exercises regularly, has no chronic health conditions, has a clean driving record, and demonstrates financial stability.

What is preferred risk insurance?

Preferred risk insurance refers to insurance policies offered to individuals who are classified as preferred risks.

These policies typically come with the most favorable premiums and coverage options because the insurer perceives these individuals as having a lower likelihood of filing a claim.

This term is most commonly used in life insurance.

What is a preferred risk classification?

A preferred risk classification is a category used by insurance companies to group applicants who exhibit characteristics that suggest they have a lower risk of experiencing an insured event (e.g., death, accident, etc.).

Insurers use underwriting processes to assess applicants based on factors like health, lifestyle, financial history, and driving record.

Those deemed to have the lowest risk are placed in the preferred risk classification.

What is the difference between preferred risk and standard risk?

Preferred Risk:

Individuals in this category are considered to have a significantly lower risk of loss compared to the average population.
They typically enjoy the most favorable insurance rates and coverage options.
Factors like excellent health, healthy lifestyle, financial stability, and a clean driving record contribute to this classification.

Standard Risk:

Individuals in this category are considered to have an average or typical level of risk.
Their risk profile aligns with the general population, and they are offered standard insurance rates.
They may have some minor health issues or lifestyle factors that prevent them from qualifying for preferred risk, but they are not considered high risk.