South Carolina Life Insurance Practice Exam

Which of the following statements is true about life insurance underwriting?

1. It is only used for whole life policies

2. It determines the policy premium based on risk assessment

3. It guarantees acceptance for all applicants

4. It is irrelevant to policy issuance

The correct answer is: It determines the policy premium based on risk assessment

The correct statement regarding life insurance underwriting is that it determines the policy premium based on risk assessment. Underwriting is a critical process in the life insurance industry where the insurer evaluates the risk associated with an applicant. This evaluation includes analyzing various factors, such as the applicant's age, health, medical history, lifestyle choices, and occupation. Based on this assessment, the insurer sets an appropriate premium that reflects the level of risk involved in insuring the individual. For instance, an applicant with a history of significant health issues may be considered a higher risk, leading to a higher premium, while someone in good health with no risky behaviors might receive a lower premium. The underwriting process ensures that the insurer can collect sufficient premiums to cover the potential claims it may have to pay. This aspect distinguishes underwriting as a fundamental part of life insurance beyond just assessing risk; it directly influences the cost and availability of coverage for applicants. The other options do not accurately capture the essential role and purpose of underwriting in life insurance.