Minnesota Life Insurance License Practice Exam

A proposed insured whose likelihood of loss is significantly less than the average is classified as?

1. Standard risk

2. Substandard risk

3. Preferred risk

4. High risk

The correct answer is: Preferred risk

When an insured is classified as a preferred risk, it means that their likelihood of experiencing a loss is significantly lower than that of the average individual. This classification typically applies to individuals who demonstrate excellent health, a strong lifestyle with no significant risk factors, and favorable medical histories, all of which lead insurers to assess them as a lower risk for claims. This status often results in lower premium rates as these individuals are seen as less likely to require payouts, benefiting both the insured, through more affordable premiums, and the insurance company, as they maintain a healthier pool of insured individuals. Understanding this classification is crucial for both insurers and insured individuals as it impacts policy availability, pricing, and coverage options. In contrast, classifications like standard risk apply to those who are considered average in terms of risk, substandard risk applies to those who present higher risk factors that could lead to more claims, and high risk is a term often informally used to suggest a significant likelihood of loss, but it doesn't reflect the structured classifications insurers typically use.