The primary purpose of underwriting in life insurance is to:

Why A is correct

The primary purpose of underwriting is to evaluate and classify applicants by risk so that the insurer can charge premiums commensurate with the risk and avoid adverse selection. Adverse selection occurs when higher-risk individuals seek insurance more eagerly than lower-risk individuals; without risk classification, healthy insureds would subsidize unhealthy ones and the insurer could become insolvent. Underwriting uses medical history, lifestyle, occupation, and other factors to assign applicants to classes, such as preferred, standard, or substandard, each with an appropriate premium.

Why the other options are wrong

• Underwriting aims to select and classify risks, not to reject all applicants; a profitable book of business includes a range of risk classes. This choice does not fit the arrangement described in the question, so it is clearly not the right option to choose.
• Insurance is inherently risk-taking; underwriting manages risk through classification, not by eliminating it entirely. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
• Charging the same premium to all applicants regardless of risk would encourage adverse selection and is the opposite of sound underwriting. This option therefore does not match the facts presented in the question and is not the correct answer to select.

Memory hook

Underwriting sorts risk into classes so that premiums stay fair.

Why A is correct

Underwriting is the process of evaluating and classifying the risk presented by each applicant so that the insurer prices the coverage appropriately and maintains a balanced risk pool. Without underwriting, adverse selection would result — applicants who are poorer risks being more likely to seek coverage — and premiums would become inadequate to cover losses. Underwriting assigns applicants to risk classes (preferred, standard, substandard), and the premium reflects the class. It does not eliminate risk-taking; insurance exists precisely because the insurer assumes risk, priced through underwriting.

Why the other options are wrong

• B) Underwriting differentiates premiums by risk class. It does not guarantee equal premiums for all applicants, because applicants present different levels of mortality risk.
• C) Issuing policies without regard to mortality would invite adverse selection and threaten the insurer’s solvency. That is the opposite of underwriting’s purpose.
• D) Underwriting prices risk rather than eliminating it. The insurer still assumes the risk through the contract, and no insurer eliminates all risk-taking.

Memory hook

Underwriting = sort the risk buckets so premiums fit the risk and the pool stays healthy.

Why A is correct

Underwriting exists to evaluate the applicant's risk of loss and assign a classification — preferred, standard, or substandard — so that premiums match the expected mortality of the risk. This prevents adverse selection, where high-risk individuals would otherwise buy coverage at average rates and undermine the insurer's pricing. The underwriting decision determines whether the applicant is accepted, declined, or rated, and at what premium.

Why the other options are wrong

• B) Underwriting may decline or rate an applicant; acceptance is never guaranteed for every applicant.
• C) Underwriting has no role in beneficiary taxation, which is governed by the Internal Revenue Code.
• D) Commissions are set by agency contracts, not by the underwriting process.

Memory hook

Underwriting = the bouncer at the risk club: check the applicant, sort the classes, keep the pool honest.