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How to Insure Your Income: Moral and Morale Hazards

An insurance company's underwriters will try to determine whether an applicant presents a moral hazard or morale hazard -- that is, whether the person behaves in a way that suggests claims problems or invites disability risks. (Some insurance professionals use these terms interchangeably.)

A person who presents a moral hazard might be the type who would file a fraudulent disability claim in times of financial distress.

The insurance industry saying "pain doesn't show up on an X-ray" gets to the issue of moral hazard. A disability policyholder could claim a whiplash neck injury as the result of a relatively minor auto accident when, in fact, he is not disabled.

Any tendency to use the disability income policy wrongfully is an example of a moral hazard.

Evidence of a moral hazard would include the loss of a driver's license, a history of substance abuse or a record of criminal activities.

In addition to moral hazards, a disability insurance company also will try to avoid any morale hazards. A morale hazard is an indifferent attitude displayed by a person that increases the risk of loss. A person who regularly receives speeding tickets might be demonstrating an indifferent attitude toward the risk of injury due to high speeds.

Again, the policy application is the main mechanism by which a company evaluates moral or morale hazards. If the company does conclude a person poses either of these additional risks, it will add a surcharge to the disability premium or -- more likely -- will decline the application.

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