Texas Life Agent Practice Exam

If an applicant for a life insurance policy is deemed a substandard risk, what is the likely action of the insurance company?

1. Reject the application

2. Charge an extra premium

3. Provide standard rates

4. Increase the policy limit

The correct answer is: Charge an extra premium

When an applicant for a life insurance policy is considered a substandard risk, it indicates that they have certain health or lifestyle factors that increase the likelihood of mortality compared to the average applicant. This classification can arise from various factors, such as pre-existing medical conditions, hazardous occupations, or high-risk behaviors. In such cases, the insurance company typically assesses the elevated risk and decides to insure the applicant, but with adjustments. Charging an extra premium is a common approach to balance the increased risk represented by the substandard status. This additional premium, often referred to as a substandard or rated premium, compensates the insurer for the higher likelihood of claims. Other options generally indicate a rejection of coverage or a standard treatment that does not reflect the applicant's elevated risk level. Therefore, charging an extra premium is the most appropriate action for an insurance company when dealing with a substandard risk. This practice allows the insurer to offer coverage while adequately accounting for the increased risk they are assuming.