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Question

Difficulty: MediumRisk Classification

Match each life insurance applicant profile to the appropriate underwriting risk classification and its resulting premium impact.

  • An applicant with excellent health, ideal weight, no tobacco use, and no family history of early cardiovascular disease.Preferred Risk - Qualifies for discounted, lower-than-average premium rates.
  • An applicant with average health and a standard BMI, who has a minor but well-controlled medical condition.Standard Risk - Qualifies for average premium rates without special restrictions.
  • An applicant in good physical health who works full-time as an underground coal miner and regularly skydives.Substandard Risk - Accepted for coverage but requires a higher premium charge, such as a flat extra.
  • An applicant with a current terminal illness and a history of severe, unmanaged chronic conditions.Declined Risk - Rejected for coverage because the mortality risk is uninsurable.

Answer

The excellent health profile maps to Preferred Risk. The average health profile maps to Standard Risk. The hazardous occupation/hobby profile maps to Substandard Risk. The terminal illness profile maps to Declined Risk.
Risk classification determines the appropriate premium by categorizing applicants based on their mortality risk. Superior overall health profiles align with Preferred Risk. Typical, average health profiles align with Standard Risk. Hazardous activities or significant health impairments align with Substandard Risk. Uninsurable hazards or terminal health issues result in a Declined Risk.

Step-by-Step Solution

1
Evaluate the mortality risk of the applicant with excellent health and lifestyle.
This applicant represents a lower-than-average risk.
Insurers reward superior physical condition and a lack of hazards with a Preferred Risk classification.
2
Evaluate the applicant with average health and a controlled medical condition.
This applicant represents a normal risk level.
Insurers place the majority of healthy applicants, even those with minor controlled issues, into the Standard Risk classification.
3
Evaluate the applicant with the hazardous job (underground miner) and avocation (skydiving).
This applicant presents a higher-than-average mortality risk due to lifestyle.
While physically healthy, the extreme hazards require a Substandard Risk classification, often utilizing a flat extra premium to compensate for the added risk.
4
Evaluate the applicant with a terminal illness.
This applicant poses a risk too great for the insurer to accept.
Unmanageable or terminal conditions lead to a Declined Risk classification because the certainty of early mortality makes them uninsurable.

Key Concept

Underwriting Risk Classifications
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Topics

Risk Classification

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