Life & Health Insurance Exam (National Portion)Life InsuranceMedium
A life insurance applicant has a history of heart disease and is considered a higher risk by the insurer. Which of the following actions is the most likely outcome for this applicant regarding their policy premium or coverage?
- AIssued a preferred risk policy with lower premiums.
- BDeclined for coverage with no alternative options.
- CIssued a standard policy with no changes.
- DIssued a substandard policy with higher premiums.
Show answer & explanationAnswer & explanation
Correct answer: D. Issued a substandard policy with higher premiums.
Applicants with health conditions like heart disease are typically classified as substandard risks. This means they will likely be issued a policy with higher premiums to compensate the insurer for the increased risk of early death.
Why the other options are wrong
- A. Preferred risk policies are for individuals in excellent health; heart disease would disqualify an applicant from this.
- B. While possible in extreme cases, insurers often try to offer coverage, even if substandard, before outright declining, especially if the risk can be quantified and priced.
- C. A standard policy is for average risks; heart disease would generally prevent this classification.
Risk Classification (Substandard)
An underwriting category for applicants who present a higher than average risk to the insurer due to health issues, hazardous occupations, or avocations. These policies are typically issued with higher premiums or modified terms.
- Also known as 'rated' policies.
- Higher premiums compensate for increased risk.
- Can include health impairments, dangerous jobs, or risky hobbies.
- Opposite of 'preferred' or 'standard' risks.
Memory trick: Underwriting sorts risks: Preferred, Standard, Substandard, or just NO.