What is the primary purpose of underwriting in disability income insurance?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Underwriting's primary purpose is to evaluate each applicant's risk and classify it into groups (standard, substandard, or declined) so the premium charged matches the expected morbidity for that class. This classification prevents adverse selection, the tendency of higher-risk individuals to seek coverage more aggressively than lower-risk ones. By gathering application data, medical history, occupation class, and avocations, the insurer decides whether to accept the risk, at what premium, and with what limitations. Without underwriting, low-risk insureds would subsidize high-risk ones, premiums would be mispriced, and the disability pool would become unprofitable.
Why the other options are wrong
- B) Equal coverage for every applicant at a single price is the opposite of underwriting's goal. Underwriting exists to differentiate applicants by risk level, so a uniform-price approach would ignore the individual probability of loss and invite adverse selection.
- C) Underwriting is a pricing and risk-selection tool, not a gate meant to reject most applicants. Most applications are accepted, usually at a standard or substandard rate; declination is reserved for risks the insurer cannot price or safely assume.
- D) Disability policies deliberately replace only a portion of pre-disability income to preserve the insured's incentive to return to work. Full-income benefits would invite malingering and create overinsurance, which is exactly what benefit limits are designed to prevent.
Memory hook
Underwriting sorts the risk, prices the risk, and blocks adverse selection.