Difficulty: Medium

Average Score: 69%

In disability income insurance, an insurer can reduce its risk by

Rationale

In disability income insurance, an insurer can reduce its risk by lengthening the elimination period.

Lengthening the elimination period means that the insured must wait longer before benefits begin, thereby reducing the overall payout duration and limiting the insurer's financial exposure in the event of a claim.

A (broadening the definition of covered disability) YOUR ANSWER

Broadening the definition of covered disability increases the insurer's risk, as more conditions would qualify for benefits. This could lead to a higher number of claims and greater financial liability for the insurer, opposite to risk reduction.

B (lengthening the benefit period) YOUR ANSWER

Lengthening the benefit period allows for a longer duration of payments to the insured if they become disabled, which increases the insurer's risk. A longer benefit period can lead to higher cumulative payouts, thus exacerbating the insurer's financial exposure.

C (lengthening the elimination period) CORRECT

By lengthening the elimination period, the insurer effectively reduces its risk, as it delays the onset of benefit payments. This time frame allows the insurer to mitigate potential claims costs, as fewer claims may be made if disabilities are not long-lasting.

D (removing an exclusion rider) YOUR ANSWER

Removing an exclusion rider increases the insurer's risk by eliminating specific conditions that would not be covered. This action potentially opens the door for more claims, thus heightening the financial burden on the insurer.

Conclusion

In disability income insurance, the strategy of lengthening the elimination period serves as a means to reduce risk for the insurer. This tactic minimizes the number of claims that can be made within a given time frame, ultimately safeguarding the insurer's financial interests. Conversely, the other options either increase risk exposure or change the terms in a manner that could lead to greater liability.

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