An applicant for life insurance truthfully states that he is terminally ill and expects to die within six months. Under the requirement that insurable losses be fortuitous, the insurer should:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
For a risk to be insurable, the loss must be fortuitous — accidental and beyond the insured's control, so that neither the fact nor the timing of the loss is certain. Here the death is virtually certain and imminent, so there is no contingency or unknown event to insure against; issuing coverage would create a guaranteed, immediate payout, which violates the fundamental requirement that insurable events be contingent or unknown. The insurer should therefore decline or heavily restrict the risk. The applicant's honesty does not make a certain loss insurable, and pricing an imminent death at standard rates would be actuarially unsound and unfair to the rest of the risk pool.
Why the other options are wrong
- B) Honesty is commendable but irrelevant to insurability; the fortuitous-loss requirement asks whether the event is accidental and uncertain, not whether the applicant disclosed it.
- C) Standard premiums assume a pool of similar, uncertain risks; pricing a nearly certain, imminent death at standard rates would be actuarially unsound and unfair to other policyholders.
- D) A physician's statement would only confirm what is already known — a certain, imminent loss — and no medical documentation can create the uncertainty the insurer requires.
Memory hook
Fortuitous means a real gamble. If the loss is a certainty, it is not insurable — honesty cannot save a sure thing.