In a policy that pays benefits for sickness, how does the length of the elimination period affect the premium?
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
The elimination period is the waiting period after disability or sickness begins during which no benefits are payable. Because a longer elimination period shifts more of the early-loss burden to the insured and away from the insurer, the insurer's expected claim cost falls and the premium is generally lower. Choosing a longer elimination period is the time-based equivalent of selecting a higher deductible: the insured assumes more initial exposure in exchange for a reduced premium. The elimination period operates as a deductible in time rather than dollars: the longer it runs, the fewer days of benefits the insurer must fund. Because that shifts more of the initial loss to the insured, the premium falls as the elimination period lengthens.
Why the other options are wrong
- A) A longer elimination period reduces the insurer's exposure to early claims, which lowers, not raises, the premium. A longer elimination period means the insurer pays benefits later, which reduces claim exposure and therefore lowers the premium, not raises it.
- B) The elimination period directly affects expected claim costs and therefore influences the premium. The elimination period is a primary pricing lever in disability and health benefit design, so claiming it has no effect on premium is incorrect.
- C) Waiving the elimination period would increase the insurer's exposure and raise the premium; it is not a standard price driver in the opposite direction. Elimination periods are set at policy issue and are not later waived as a pricing device; the premium trade-off runs through the length of the period itself.
Memory hook
Elimination period is a time deductible: wait longer, pay less premium.