Life & Health Insurance Exam Life & Health Insurance Underwriting and Risk Classification 2 — Questions and Answers
Question 1: A life insurance applicant discloses a history of Type 2 diabetes diagnosed 5 years ago, well-controlled with oral medication. How would an underwriter most likely classify this risk?
- Standard risk with no premium adjustment
- Substandard risk with a rated premium (Correct answer)
- Declined due to uninsurability
- Preferred risk eligible for discounted premium
Correct answer: Substandard risk with a rated premium
Well-controlled Type 2 diabetes typically results in a substandard (rated) classification because it increases mortality risk, though it is usually still insurable.
Question 2: Which underwriting factor is considered a 'moral hazard' rather than a physical hazard?
- A history of heart disease
- An applicant's intention to defraud the insurer (Correct answer)
- High-risk occupational exposure to chemicals
- Overweight body mass index
Correct answer: An applicant's intention to defraud the insurer
Moral hazard refers to the risk that an individual's character or dishonest intent may increase the chance of a fraudulent claim.
Question 3: What is the primary purpose of the Medical Information Bureau (MIB) in life insurance underwriting?
- To set premium rates for all insurers nationwide
- To share coded medical data among member insurers to detect omissions (Correct answer)
- To provide binding medical diagnoses for applicants
- To regulate insurer underwriting guidelines
Correct answer: To share coded medical data among member insurers to detect omissions
The MIB allows member insurers to share coded medical information to identify inconsistencies or omissions in insurance applications.
Question 4: An underwriter discovers that an applicant for a $2 million life policy has only $60,000 in annual income and no dependents. What concern does this raise?
- The applicant is likely a preferred risk
- There may be an insurable interest problem (Correct answer)
- The face amount violates state minimums
- The applicant cannot purchase term insurance
Correct answer: There may be an insurable interest problem
A policy face amount grossly disproportionate to income and lack of dependents raises an overinsurance/insurable interest concern, suggesting possible moral hazard.
Question 5: Which of the following best describes a 'flat extra' premium in life insurance underwriting?
- A percentage increase added to the base premium for the entire policy period
- A fixed dollar amount per $1,000 of coverage added for a specified period (Correct answer)
- A one-time upfront fee charged at policy issuance
- A penalty charged when the insured engages in hazardous activities
Correct answer: A fixed dollar amount per $1,000 of coverage added for a specified period
A flat extra is a fixed dollar amount per $1,000 of coverage added to the standard premium, often used for temporary substandard conditions.
Question 6: An applicant has a family history of Huntington's disease but tests negative for the gene mutation. How should an underwriter treat this information?
- Rate as if the applicant has the disease
- Consider the negative test result favorably, reducing or eliminating the family history concern (Correct answer)
- Decline the application regardless of test results
- Ignore family history entirely since it is not the applicant's condition
Correct answer: Consider the negative test result favorably, reducing or eliminating the family history concern
A confirmed negative genetic test result for Huntington's disease significantly reduces the hereditary risk, and underwriters generally treat it favorably.
Question 7: Which of the following is a key difference between 'simplified issue' and 'guaranteed issue' life insurance underwriting?
- Simplified issue requires a full medical exam; guaranteed issue does not
- Simplified issue uses health questions but no exam; guaranteed issue accepts all applicants regardless of health (Correct answer)
- Guaranteed issue is available only to preferred risks; simplified issue is for substandard risks
- Both require the same underwriting process but differ only in face amount limits
Correct answer: Simplified issue uses health questions but no exam; guaranteed issue accepts all applicants regardless of health
Simplified issue requires applicants to answer health questions but skips the medical exam, while guaranteed issue accepts all applicants without any health questions.
Life & Health Insurance Exam Life & Health Insurance Underwriting and Risk Classification 2
A life insurance applicant discloses a history of Type 2 diabetes diagnosed 5 years ago, well-controlled with oral medication.
How would an underwriter most likely classify this risk?