Question

You see an advert for life insurance for anyone over 45 years old. No medical examination is required. Do you expect the premium rates to be high, low or average ? Why?

Short answer

The premium rates are likely to be high due to increased risk.

Step-by-step solution

Understanding the Offer

The advert mentions life insurance for people over 45 years old without requiring a medical examination. This signifies that the insurance company is willing to provide coverage without assessing the health status of the individuals.

Risk Assessment

Life insurance companies typically evaluate the risk of insuring a person, which often involves a medical examination to check for pre-existing conditions or health risks. When there is no medical exam, the insurer takes on a higher risk, as they cannot assess the potential health problems of the applicants.

Market Implication

Higher risk for the insurer usually translates into higher premiums. Since the insurer cannot screen applicants through a medical exam, they need to cover potential losses that arise from insuring people with hidden health issues.

Conclusion

Given that the insurer is offering to cover individuals without assessing their health, and considering the increased risk associated with this policy decision, it is logical to expect that the premiums will be higher to offset potential costs.

Key concepts

Risk Assessment

Risk assessment is the process used by insurance companies to determine the potential risk involved in insuring a person. This procedure usually involves evaluating the applicant’s health through medical exams and health questionnaires. When it comes to life insurance, the insurer aims to gauge the likelihood of the individual making a claim, based on their age, lifestyle, and medical history. By analyzing these factors, insurance companies can decide the appropriate level of risk they are taking on and adjust the premiums accordingly. In the context of an insurance policy that does not require a medical examination, as described in the original exercise, the risk assessment becomes challenging. The insurer is unable to accurately assess the applicant's health risks, leading to an increased uncertainty about future claims. This uncertainty effectively means that the insurer is gambling a bit, as they take on the possibility of insuring someone with undisclosed health issues. Without thorough risk assessment, the insurer often decides to charge higher premiums to protect against the financial losses that may arise from this increased risk.

Premium Rates

Premium rates are the monetary amount that policyholders must pay to the insurance company for their coverage. Determining these rates is a blend of art and science, where the science part involves using actuarial data, statistical models, and risk assessments. Higher risk associated with a policy demands higher premium rates. This is a simple risk-return equation for insurers. For no-medical-exam policies, the company does not have in-depth knowledge about the candidate's health.

• This leads to assuming a higher chance of payout.
• Thus, subscribers typically see higher premiums.

Insurance companies must ensure they collect enough money from premiums to pay out future claims and remain profitable. Therefore, in scenarios where assessing individual health risks is not possible, the premium rates need to reflect this increased likelihood of claims.

Life Insurance

Life insurance is a type of coverage designed to provide financial security to the insured person's beneficiaries in the event of their death. It serves as a safety net, ensuring that family or dependents have financial support. Life insurance plans are varied, ranging from term life insurance, which provides coverage for a specific period, to whole life insurance, offering lifetime protection with an investment component. For policies targeting individuals over 45, the main concern is often addressing pre-existing health conditions. In our original case, the absence of medical exams means the policy is more attractive to those who might be denied coverage otherwise.

• This inclusivity helps people who may otherwise face hurdles due to their health.
• Prospective policyholders should, however, be mindful of the resulting higher premiums.

By understanding these nuances, prospective buyers can make informed choices about life insurance products and better secure their financial future.