The primary purpose of underwriting in life insurance is to:

Why D is correct

Underwriting exists to evaluate each applicant's risk and place the applicant into the appropriate risk classification, such as preferred, standard, or substandard. This protects the risk pool by preventing adverse selection — the tendency of those most likely to die to seek the most coverage. By charging premiums that match the risk presented, the insurer keeps rates equitable for all policyholders and remains financially sound. Investment income, commissions, and uniform pricing are not the purposes of underwriting; they are separate pricing and distribution matters.

Why the other options are wrong

• A) Charging every applicant the same premium would force low risks to subsidize high risks and encourage adverse selection, defeating the purpose of underwriting.
• B) Investment income is earned on reserves and premiums, but it is not what underwriting is designed to achieve.
• C) Commissions are set by compensation schedules, not by the underwriting classification of the risk.

Memory hook

Underwriting sorts apples by risk so premiums stay fair.

Why A is correct

The primary purpose of underwriting is to select and classify risks. Underwriters evaluate each applicant's characteristics — age, health, occupation, habits — and place them into risk classes such as preferred, standard, and substandard, so that the premium charged reflects the expected loss experience of that class. Accurate classification also guards against adverse selection, the tendency of high-risk individuals to seek coverage disproportionately. Without underwriting, the risk pool would become unbalanced and premiums would be unfairly high for low-risk insureds, which would eventually drive good risks out of the market entirely.

Why the other options are wrong

• B) No insurer can guarantee that a loss will not occur; insurance only pays covered losses, and underwriting manages and prices risk rather than eliminating the possibility of loss.
• C) Issuing as many policies as possible regardless of health would unbalance the risk pool and invite adverse selection — the exact opposite of sound underwriting.
• D) Charging one uniform premium would ignore legitimate differences in risk and misclassify applicants, which is not the purpose of underwriting but rather a failure of it.

Memory hook

Underwriting sorts the pool: preferred, standard, substandard. Classify right, and the premiums come out right.