Upon reviewing a comprehensive life insurance application, an underwriter notes that the applicant has an impeccable medical history but regularly participates in extreme deep-sea wreck diving. The company's actuarial guidelines determine that this avocation presents a significant, constant mortality hazard that remains level over time and does not progressively worsen as the insured ages. To properly issue this policy under a substandard risk classification, which rating method should the underwriter utilize?
- Applying a flat extra premium to the standard rateAnswer
- BUtilizing a tabular rating to charge premiums based on a higher age bracket
- CImplementing a lien plan with a reduced initial death benefit that increases over time
- DClassifying the hazard as speculative and utilizing risk retention methods
Answer
Applying a flat extra premium to the standard rate
When a substandard risk is caused by a hazardous occupation or avocation that presents a constant, stable level of risk independent of the insured's age, underwriters apply a flat extra premium. This is a set additional fee charged per thousand dollars of coverage that accounts for the stable threat of an accident without treating the applicant as if their underlying health is failing.
Step-by-Step Solution
Key Concept
Substandard Risk Rating Methods (Flat Extra vs. Tabular Rating)