Life & Health Insurance Exam (National Portion)Underwriting and Policy IssueMedium
A life insurance company receives an application from a 70-year-old individual who has recently been diagnosed with a terminal illness. The underwriter determines the applicant poses an unacceptably high risk. What action will the underwriter most likely take?
- APostpone the coverage until the applicant's health improves.
- BIssue the policy with a substandard rating and higher premiums.
- CIssue the policy with an exclusion rider for the terminal illness.
- DDecline the application.
Show answer & explanationAnswer & explanation
Correct answer: D. Decline the application.
When an applicant presents an unacceptably high risk, such as a terminal illness, the insurer's most common action is to decline the application. A terminal illness typically makes an individual uninsurable for standard life insurance policies.
Why the other options are wrong
- A. Postponing coverage is usually for temporary conditions that are expected to improve, not a terminal illness.
- B. Substandard rating applies to higher-than-average, but still insurable, risks; terminal illness is often beyond this.
- C. Exclusion riders are more common for specific hazardous activities or pre-existing conditions, not usually for a terminal illness in life insurance.
Declined Risk
An applicant whose risk is deemed too high or uninsurable by the insurer, resulting in the refusal to issue a policy.
- Applicant is uninsurable
- No policy issued
- Common reasons: terminal illness, extreme hazardous activities
Memory trick: Too Risky? Decline, Postpone, Rate, or Exclude. But Terminal means NO.