Financial underwriting aims to prevent which scenario in life assurance?

Financial underwriting is a crucial process in life assurance that assesses the financial needs and situation of applicants to ensure that the level of coverage they seek is appropriate relative to their financial circumstances. The primary aim of financial underwriting is to prevent overinsurance, which occurs when an individual obtains life insurance coverage that exceeds their financial needs or the economic benefit derived from their life.

Overinsurance can result in significant risk for insurers, as it increases the potential payout for claims—especially when policyholders have little to no financial dependency requiring such high coverage. By evaluating the applicant's financial situation, insurers can set appropriate limits on the amount of insurance issued, ensuring that it is in line with their financial responsibilities and needs. This safeguards both the insurer from potential losses and the insured from unnecessary financial burden.

While the other scenarios presented may have relevance in the broader context of underwriting, they do not align specifically with the primary focus of financial underwriting, which is centered on ensuring that applicants do not acquire more insurance coverage than they financially justify.