The primary purpose of underwriting in disability income insurance is to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Disability income underwriting evaluates applicants to prevent adverse selection, the tendency of higher-risk individuals to seek coverage more readily than average-risk people, and to place applicants into risk classes (for example, preferred, standard, and substandard) that are charged premiums commensurate with their expected morbidity. This classification keeps the premium structure equitable for all policyholders and protects the insurer's financial soundness. Underwriting considers occupation, health history, age, and other rating factors to estimate the likelihood and severity of disability, which is the foundation of sound disability income pricing.
Why the other options are wrong
- B) Underwriting classifies applicants into different risk groups charged different premiums; identical coverage and premium for everyone would ignore individual risk differences and create adverse selection.
- C) Investment return is a pricing component, not an underwriting goal; policy size alone does not determine underwriting decisions.
- D) Tax treatment of benefits is set by federal tax rules based on who paid the premiums, not by the underwriting process.
Memory hook
Underwriting sorts the good risks from the bad and prices each group fairly. No sorting, no fair pricing.