Texas General Lines — Life, Accident, Health and HMOLife InsuranceHard
An applicant for a $1,000,000 life insurance policy is found to be a substandard risk due to a pre-existing health condition. Which of the following actions is the insurer LEAST likely to take?
- AIssue the policy with an extra percentage table rating.
- BIssue the policy as applied for without modification.
- CIssue the policy with a flat extra premium.
- DDecline the application.
Show answer & explanationAnswer & explanation
Correct answer: B. Issue the policy as applied for without modification.
When an applicant is classified as a substandard risk, the insurer will typically take actions to cover the increased risk, such as charging higher premiums (through a flat extra premium or a table rating), or reducing coverage. Issuing the policy as applied for without modification is the least likely action, as it would expose the insurer to an uncompensated increased risk.
Why the other options are wrong
- A. This is a common method for insuring substandard risks, by charging a higher premium based on a table.
- C. This is another common method for insuring substandard risks, by adding a fixed additional premium.
- D. Declining the application is a possible action for very high substandard risks, or if the risk is outside the insurer's underwriting guidelines.
Substandard Risk Underwriting
When an applicant is classified as a substandard risk (higher than average risk), insurers implement measures such as higher premiums or reduced coverage to compensate for the increased risk.
- Higher mortality or morbidity risk.
- Methods: table ratings, flat extra premiums, exclusion riders.
- Rarely issued at standard rates without modification.
Memory trick: Substandard: Higher risk, higher price, or no dice.