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Question

Difficulty: MediumRisk Classification

A prospective policyowner completes an application for a permanent life insurance policy. The associated medical exam reveals that the applicant has significantly elevated cholesterol and a family history of premature heart disease. The insurer determines that while the applicant is insurable, they represent a higher-than-average mortality risk. Which of the following describes the most likely risk classification and corresponding rating method for this applicant?

  1. Substandard risk, subject to a higher premium typically calculated using a tabular rating methodAnswer
  2. B
    Standard risk, with a flat extra premium added temporarily until the applicant's health metrics improve
  3. C
    Speculative risk, which allows the insurer to issue the policy with an exclusionary rider for cardiovascular events
  4. D
    Uninsurable risk, requiring the producer to refer the applicant to the state Guaranty Association for coverage

Answer

The applicant will be classified as a substandard risk and charged a higher premium using a tabular rating method.
An applicant presenting a higher-than-average mortality risk due to medical history is classified as a substandard risk. To compensate for this elevated risk, insurers typically apply a tabular rating method. This method groups substandard risks into tables, charging a percentage above the standard premium rate to account for health conditions that generally deteriorate as the insured ages.

Step-by-Step Solution

1
Analyze the applicant's medical findings.
The applicant has elevated cholesterol and adverse family history, indicating a higher-than-average mortality risk.
Underwriters use medical and family history to determine expected mortality.
2
Determine the appropriate risk classification.
The risk is categorized as Substandard.
Average risks are Standard, above-average health is Preferred, and below-average health but still insurable is Substandard.
3
Identify the proper premium rating method for the health condition.
A tabular rating is applied.
Health impairments typically use a tabular (table) rating because the risk of death increases with age, whereas flat extra premiums are used for constant hazards like hazardous occupations.

Key Concept

Risk Classification and Substandard Rating Methods
Estimated Time:1m 15s
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Topics

Risk Classification

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