Question 74

Preferred risks pay a lower premium than standard risks.

Preferred risks are those individuals who present a lower likelihood of making a claim, and as a result, they typically receive lower premiums compared to standard risks who may have a higher likelihood of claims.

A) Substandard applicants are never issued policies.

This statement is incorrect because substandard applicants can be issued policies, but they generally face higher premiums or specific exclusions due to their higher risk profile. Insurers often provide coverage but at terms that reflect the increased risk.

B) Rated policies merit lower premiums.

This statement is false as rated policies actually come with higher premiums due to the increased risk associated with the insured individual. A rated policy indicates that the individual has been classified as a higher risk, leading to a corresponding increase in premium costs.

C) A preferred individual is issued a rated policy.

This statement is incorrect because a preferred individual is typically issued a standard or preferred policy, which reflects their lower risk status and results in lower premiums. Rated policies are assigned to those considered higher risk, which is contrary to the characteristics of a preferred individual.

D) Preferred risks pay a lower premium than standard risks.

This statement is true as preferred risks are assessed to have a lower probability of claims and, therefore, are rewarded with lower premium rates compared to standard risks. This classification is a fundamental principle in risk assessment and pricing within insurance.

Conclusion

The correct answer, D, accurately reflects the relationship between risk classification and premium pricing in insurance. Preferred risks are inherently less risky, allowing insurers to offer them lower premiums than standard risks, while all other options either misstate the nature of policy classifications or the associated premium implications.