A disability income insurer that places applicants into preferred, standard, and substandard classes is engaging in:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Risk classification is the process of grouping applicants with similar expected loss potential and charging each group a premium that reflects its risk. Preferred classes receive lower premiums; substandard risks pay an extra premium or receive a benefit limitation. This classification is the core of disability income underwriting because it keeps premiums affordable for the majority while allowing higher-risk individuals to obtain coverage at an appropriate price. Guaranteed issue, reinsurance, and rescission are separate concepts with different purposes and should not be confused with the classification function.
Why the other options are wrong
- B) Guaranteed issue means coverage is offered without medical underwriting to all eligible applicants, the opposite of classifying risks.
- C) Reinsurance transfers a portion of the insurer's risk to another company; it is not the same as classifying applicants.
- D) Rescission is the cancellation of a policy, often retroactively for material misrepresentation; it is not a classification method.
Memory hook
Sort the risks, price the groups. Classification turns unknown futures into fair, affordable premiums.