Which of the following is the most important factor in the pricing of disability income insurance?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Disability income rates are built primarily on morbidity, the frequency and severity of disability-causing sickness and injury within a risk class. Because disability policies pay benefits while the insured is disabled and alive, the mortality table used in life insurance is not the pricing foundation. Instead, actuaries use morbidity assumptions combined with the benefit amount, benefit period, elimination period, expense load, and expected investment earnings. Occupation class, age, and health feed directly into the morbidity assumption. Getting morbidity right is essential, because it drives how often and how long benefits are paid.
Why the other options are wrong
- B) The mortality table, which measures death rates, is the foundation for pricing life insurance. Disability income pays benefits while the insured is disabled and alive, so mortality is not the primary pricing basis for this product.
- C) Investment earnings are one element of rate making, but stock market performance is not a direct pricing input. Rates are built on morbidity, benefit duration, elimination period, expenses, and interest assumptions.
- D) The applicant's tax bracket plays no role in disability rate making. Premiums are driven by the probability and cost of disability claims for the risk class, not by the applicant's income tax situation.
Memory hook
Disability is priced on sickness (morbidity), not on death (mortality).