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Question

Difficulty: MediumRisk Classification

An independent contractor completes a life insurance application and undergoes the required medical examination. The resulting medical report indicates a chronic, progressive cardiovascular condition that statistically shortens life expectancy, though the applicant's current lifestyle and administrative occupation present no unusual dangers. Which of the following accurately describes how the insurer will categorize this applicant and adjust the policy premium?

  1. The individual will be placed in a rated classification, and the insurer will apply a tabular extra premium based on the progressive nature of the condition.Answer
  2. B
    The individual will receive a baseline classification because their low-risk occupation completely offsets the cardiovascular medical history.
  3. C
    The individual will be placed in an elevated risk tier, and the insurer will assess a flat extra premium charge per thousand dollars of coverage.
  4. D
    The individual will be deemed completely uninsurable because the presence of any progressive internal health condition automatically mandates a declination.

Answer

The applicant will be assigned to a rated (substandard) classification subject to a tabular extra premium.
The correct answer accurately reflects that a chronic, progressive health issue places an applicant in a substandard (often called 'rated') risk tier. To price this risk accurately, actuaries use tabular ratings, which apply a percentage surcharge to the standard premium to account for health risks that escalate over time.

Step-by-Step Solution

1
Evaluate the applicant's risk factors presented in the scenario.
The applicant has a progressive cardiovascular condition, but a safe occupation and lifestyle.
Identifying all hazards is the first step in determining the correct underwriting classification.
2
Determine the appropriate risk classification based on the medical finding.
The applicant falls below standard guidelines due to reduced life expectancy, resulting in a substandard (rated) classification.
Substandard risk classes are used for individuals with medical conditions, hazardous occupations, or dangerous hobbies that increase mortality.
3
Identify the correct premium adjustment method for a progressive medical condition.
A tabular rating is applied.
Tabular ratings are percentage multipliers of the standard rate used for medical conditions where the risk increases with age. Flat extra premiums are reserved for constant risks like aviation or hazardous jobs.

Key Concept

Substandard Risk Classification and Tabular Rating
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Topics

Risk Classification

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