PSI Life Exam Practice Test

What is generally the main reason for charging higher premiums for older individuals?

1. Longer life expectancy

2. Increased likelihood of claims

3. Lower income

4. Less financial stability

The correct answer is: Increased likelihood of claims

Charging higher premiums for older individuals is primarily due to the increased likelihood of claims. As people age, they typically face a higher risk of health issues and medical conditions, which can lead to more frequent or severe insurance claims. Insurance companies assess this risk through actuarial tables and data that show an increased probability of health-related claims among older populations. Consequently, to cover these anticipated costs and maintain their financial viability, insurers charge higher premiums to older individuals. This pricing strategy reflects the inherent risk associated with insuring a demographic that has a greater probability of needing medical care and, thus, filing claims. The other factors—such as longer life expectancy, lower income, and less financial stability—do not directly influence the pricing of premiums in the same way that the likelihood of claims does. While these factors may play a role in comprehensive assessments of individuals or markets, they do not address the core actuarial reasoning behind premium pricing.