An insurer receives an application but decides the applicant's health is too risky for standard rates. The insurer issues the policy at a higher premium for the same coverage. This underwriting result is called a:

Why A is correct

When an applicant presents above-average risk but is still insurable, the insurer may issue a rated, or substandard, policy, which means coverage at a higher premium than standard rates, often expressed as an extra premium per thousand dollars of coverage. The rating reflects the additional mortality risk from conditions such as high blood pressure or a hazardous occupation. The applicant is free to accept the offer or decline it. A rated policy is a counteroffer to the original application, not a declination, and the insurer must disclose the rating to the applicant and the agent.

Why the other options are wrong

• A declined application is a rejection of coverage altogether, not a higher-premium offer; a rated policy still provides coverage to the applicant. This choice does not fit the arrangement described in the question, so it is clearly not the right option to choose.
• A preferred policy is issued at the lowest rates to applicants with excellent health, the opposite of a substandard rating. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
• A modified endowment contract is a tax classification based on premium payments exceeding the 7-pay limit, unrelated to health-based rate-ups. This option therefore does not match the facts presented in the question and is not the correct answer to select.

Memory hook

Rated means yes to coverage, but at a risk-adjusted price.

Why B is correct

When the insurer does not accept the application exactly as submitted, its response, such as a policy with a higher premium, an endorsement, or a reduced amount, is a counteroffer. The applicant's signed acceptance and premium payment complete the contract on the counteroffered terms. Until the applicant accepts, no contract exists on those modified terms, which is why the applicant must explicitly accept a rated or endorsed policy before coverage becomes effective.

Why the other options are wrong

• A) The application was not accepted as submitted; the modified offer replaces it, and no contract forms until the applicant accepts it.
• C) A contract is not void merely because the premium changed; the change is a lawful counteroffer that the applicant may accept or reject.
• D) Life insurance is not bound at the point of sale, and no binder mechanism applies to modified terms.

Memory hook

A rated and endorsed offer is a new deal on the table. Sign and pay, and the new terms are yours.