Life insurance companies require that prospective policy holders have a medical check‐up before the companies will sell the policy because of a(n) ________ problem in which the insured could be ________ than expected.
A) moral hazard; healthy and live longer
B) moral hazard; unhealthy and die sooner
C) adverse selection; healthy and live longer
D) adverse selection; unhealthy and die sooner

Question

Quizplus · Accepted Answer

Adverse selection refers to a situation where the seller has less information than the buyer, leading to the potential for those who are more likely to claim insurance (in this case, unhealthy individuals) to be more inclined to buy it. Life insurance companies require medical check-ups to mitigate this risk by better assessing the health status of the insured, aiming to prevent a scenario where they are more likely to insure individuals who are at a higher risk of dying sooner than expected.

Life Insurance Companies Require That Prospective Policy Holders Have a Medical