EXAMFX Underwriting and Policy Issue 2 — Questions and Answers
Question 1: Which factor is considered a UNFAVORABLE underwriting factor for life insurance applicants?
- Regular exercise habits
- Family history of hereditary disease (Correct answer)
- Non-smoker status
- Stable employment
Correct answer: Family history of hereditary disease
A family history of hereditary diseases increases mortality risk and is considered an unfavorable underwriting factor.
Question 2: What is the purpose of a reinsurance arrangement in underwriting?
- To reduce premium costs for policyholders
- To transfer a portion of risk to another insurer (Correct answer)
- To increase the insurer's surplus funds
- To expedite the policy issuance process
Correct answer: To transfer a portion of risk to another insurer
Reinsurance allows an insurer to transfer part of its risk to another company, limiting exposure on large or high-risk policies.
Question 3: When an insurer issues a policy with a higher premium than applied for, this is called a:
- Conditional receipt
- Counteroffer
- Binding receipt
- Substandard rating (Correct answer)
Correct answer: Substandard rating
A substandard rating results in a higher premium charged to applicants who present greater-than-average risk.
Question 4: Which document serves as the insurer's formal acceptance of a life insurance application?
- Binder
- Conditional receipt
- Issued policy (Correct answer)
- Agent's report
Correct answer: Issued policy
The issued policy represents the insurer's formal acceptance of the application and creates the insurance contract.
Question 5: What does a 'table rating' indicate about an insurance applicant?
- The applicant is a preferred risk
- The applicant is declined coverage
- The applicant poses a higher-than-standard risk requiring a premium surcharge (Correct answer)
- The applicant qualifies for a group rate
Correct answer: The applicant poses a higher-than-standard risk requiring a premium surcharge
Table ratings (1-16 or A-P) indicate substandard risks and correspond to premium increases above the standard rate.
Question 6: An underwriter reviewing an application finds the applicant is a pilot who flies private aircraft. This would most likely result in:
- Immediate policy decline
- An aviation exclusion rider (Correct answer)
- Standard rates with no changes
- A waiver of premium benefit
Correct answer: An aviation exclusion rider
Aviation exclusion riders exclude death resulting from private aviation activity, allowing coverage to be issued without fully rating for the added risk.
Question 7: What is 'adverse selection' in the context of insurance underwriting?
- The insurer's choice to deny high-risk applicants
- The tendency of higher-risk individuals to seek more insurance coverage (Correct answer)
- The underwriter's selection of preferred risks only
- The process of selecting beneficiaries
Correct answer: The tendency of higher-risk individuals to seek more insurance coverage
Adverse selection occurs when people with higher risk are more likely to purchase insurance, potentially unbalancing the risk pool.
EXAMFX Underwriting and Policy Issue 2
Which factor is considered a UNFAVORABLE underwriting factor for life insurance applicants?