Question

"An insured purchases a $100,000 Accidental Death and Dismemberment policy that will pay triple indemnity for death caused when riding in a common carrier. If the insured is killed in a commercial airplane crash, the policy will pay a MAXIMUM of?"

a) $100,000

b) $200,000

c) $300,000

d) $400,000

Answer 1

c) $300,000

The policy will pay a maximum of $300,000 in the event of the insured's death due to a commercial airplane crash, because the policy includes a triple indemnity clause for common carrier accidents, tripling the standard $100,000 coverage.

Step-by-step explanation:

If the insured purchases a $100,000 Accidental Death and Dismemberment policy with a triple indemnity clause for deaths caused while riding in a common carrier, the policy will pay a maximum of $300,000 in the event of death due to a commercial airplane crash. This is because triple indemnity means the policy will pay three times the amount of the standard coverage, which in this case is $100,000.

To illustrate how insurance works more broadly using an example from automobile insurance, consider that if each of the 100 drivers pays a $1,860 premium each year, the insurance company collects $186,000 needed to cover the anticipated costs of accidents.

However, if only high-risk drivers buy the insurance at the set price, because low and medium-risk drivers opt out due to their lower chances of accidents, the insurance company may lose money as the premiums collected will not cover the higher average costs of claims from high-risk individuals. This phenomenon is known as adverse selection.