Examkin

Question

Difficulty: MediumRisk Classification

Marcus is applying for a substantial life insurance policy. His medical exam, laboratory results, and family history are exceptional, which would normally qualify him for the company's most favorable premium tier. However, the underwriter discovers through an inspection report that Marcus frequently participates in competitive amateur auto racing.

Based on standard risk classification practices, how will the underwriter most likely address this avocational hazard?

  1. A
    Apply a substandard tabular rating because the mortality risk associated with auto racing increases progressively as the insured ages.
  2. B
    Decline the application because participating in competitive racing transforms the life insurance contract into a speculative risk.
  3. Offer the policy with an exclusion rider for the racing activity, or provide full coverage subject to a flat extra premium.Answer
  4. D
    Categorize the racing as a moral hazard and decline the application, as competitive driving demonstrates intentional fraudulent tendencies.

Answer

Offer the policy with an exclusion rider for the racing activity, or provide full coverage subject to a flat extra premium.
When an applicant is medically healthy but engages in a hazardous hobby, underwriters typically address the specific risk by either charging a flat extra premium (a set dollar amount per $1,000 of coverage) to cover the activity, or by attaching an exclusion rider that denies a death benefit if the insured dies as a direct result of that specific activity. This approach preserves the applicant's otherwise favorable health classification.

Step-by-Step Solution

1
Evaluate the applicant's medical profile.
The exceptional medical exam and family history qualify the applicant for preferred or standard rates based solely on health.
Underwriting strictly separates medical risks from avocational (hobby) and occupational risks to ensure fair pricing.
2
Analyze the impact of the avocational hazard (auto racing).
Auto racing represents a constant, physical hazard rather than a declining or progressively increasing medical condition.
Identifying the hazard type determines the appropriate premium rating method. Tabular ratings are used for health issues that worsen over time, whereas flat extra premiums are used for constant hazards.
3
Determine the appropriate risk classification outcome.
The underwriter will typically offer the applicant a choice between full coverage with a flat extra premium or standard rates with an exclusion rider specifically for the racing activity.
This strategy allows the insurer to appropriately charge for or exclude the specific risk without unfairly penalizing the applicant's excellent health profile.

Key Concept

Handling Avocational Hazards in Risk Classification
Rate this question

Topics

Risk Classification

More questions from this topic