South Carolina Insurance Practice Exam

What factor is most commonly used when underwriting a disability income policy?

1. Medical history

2. Annual earnings

3. Age of the applicant

4. Current employment status

The correct answer is: Annual earnings

Annual earnings are a critical factor in underwriting a disability income policy because these policies are designed to replace a portion of a person's income if they become disabled and unable to work. Insurers need to assess how much income to replace, which directly correlates to the annual earnings of the applicant. Understanding an applicant's earnings helps insurers determine the appropriate benefit amount and the premium needed for the policy. Higher annual earnings generally imply a greater benefit is required to maintain the applicant's standard of living if they face disability. Additionally, underwriting based on annual earnings allows the insurer to evaluate the risk associated with the applicant’s occupation and income level, which can influence both the policy terms and conditions. While medical history, age, and current employment status are also relevant factors in the underwriting process, they do not directly quantify the income that the policy is meant to replace as crucially as annual earnings do. This makes annual earnings the most pertinent choice in this context.