California Life and Health Insurance Practice Exam

Which risk classification charges the lowest premium?

1. Standard

2. Preferred

3. Substandard

4. Higher risk

The correct answer is: Preferred

The classification that charges the lowest premium is the preferred risk classification. Individuals categorized under this classification are generally considered to have a lower likelihood of filing claims due to better health, lifestyle choices, and overall risk factors. Insurers assess these individuals positively based on criteria such as excellent health records, non-smoking status, and no significant history of serious health issues. As a result, preferred risk individuals benefit from lower premiums because they present a diminished financial risk to the insurer. Standard, substandard, and higher-risk classifications typically incur higher premiums. Standard risk individuals represent a baseline of average risk, substandard classifications indicate higher risks that require increased premiums to cover potential claims, and the higher-risk classification represents those with significantly elevated odds of claim frequency or severity. Consequently, these classifications are more expensive as they align with the presumably increased likelihood of filing claims compared to preferred risks.