PSI Life Exam Practice Test

Insurance applications evaluated with an average life expectancy and no significant risk factors are considered which type of risk?

1. Standard

2. Preferred

3. Substandard

4. Declined

The correct answer is: Standard

The correct answer is that insurance applications evaluated with an average life expectancy and no significant risk factors are considered standard risk. In the insurance context, "standard risk" refers to applicants who are expected to have average mortality rates and who do not present any unusual or elevated health risks when compared to the general population. This categorization is fundamental in underwriting because it helps insurers determine the appropriate premium rates. A standard risk generally corresponds to individuals whose lifestyle, health history, and age align with the typical expectations for their demographic group. As a result, these individuals are likely to pay premiums that reflect the average cost of insuring people in that category. In contrast, other classifications like preferred risk are generally healthier individuals who may qualify for lower premiums due to lower expected claims, while substandard risk includes those with health issues or higher likelihoods of claims, leading to higher premiums. A declined risk category represents those whose applications are rejected altogether due to significantly elevated risk factors. Understanding these classifications is essential for both insurers and applicants, as they directly affect the terms of life insurance policies.