Question

Life insurance companies usually charge a higher premium to smokers than non-smokers. Given this, what is the potential for adverse selection and moral hazard in the process of new applicants? How can the company reduce or eliminate those problems?

Most credit cards charge a relatively high rate of interest, yet low-risk borrowers carry them. The adverse selection concept says that low-risk borrowers should be discouraged from credit cards. Why is this not the case?

Your friend maintains a very high balance on her credit card. She's also missed a few payments but thinks its not a big deal and the only cost is a little extra interest added to the balance. You know that it will cost her a lot more. Explain how her handling of this debt can impact what she pays on future debt.

Answer 1

The ife insurance premium is generally higher for smokers than on-smokers. The company have to use the medical history of the applicant. The company can also ask for current medical situation. An indepth analysis needs to be done. Also the company can conatct the close relatives or friends to know the person well. There should be clause if the medical report is uncorrect then policy is ended forfeiting all the payment done.

Credit card is one of the financial investment that one keeps. Given all the factor, a low risk borrowers carries it as it can be used in emergency cases. They may be some situation in which the funds needed instantly and in those ways, credit card can be the most effective one. That's why a low risk borrower would like to carry it.

The credit card timely payment is very important. It incurs a cost and that cost is compunding in nature. Most of the credit card comes with high interest rate and that to with compunding. If the payment is not made timely this will increase the interest charge. Also, the creditworthiness will decrease and will affect the further borrowings. Therfore, one should handle it very carefully.