7: Application, underwriting and ownership Flashcards
The contractual process - 3 stages
- Offer (invitation to treat)
- Acceptance
- Consiseration
Capacity to Contract - who is restricted?
- Minor - those under age 18 usually cannot enter a contract
- Mentally impaired persons
Who provides authorisation for companies to enter contacts with proposers?
The PRA
Insurable interest - What is it? Main principles?
the policyholder cannot take out a policy on someone else’s life (the life assured) unless they can show
that they would ** suffer a measurable financial loss if that person were to die.**
Main principles
* Insurable interest is a quantifiable financial interest that results from a legally recognised relationship
* The sum assured cannot be greater than the amount of the financial interest.
* The policy must expressly state on whose behalf it has been effected (that is, the
policyholder).
* Insurable interest needs only to exist on the date when the contract is made. It does
not need to continue for the duration of the policy and, specifically, it does not have
to exist at the time of a claim.
What is the exception to the rule of insurable interest?
Spouses and civil partners are said to automatically have unlimited insurable interest in the other party
an individual has an unlimited insurable interest in their own life. People can apply
for life assurance on their own life for any amount.
Common situations in which insurable interest can usually be established
- Divorcees
- Joint borrows of a mortgage loan in each other
- Employer on employee if their death would cause financial harm
- A lender has insurable interest in the life of a borrower
- Partners in a business have an insurable interest in the lives of the other partners
Parents and children do not automatically have insurable interest in each other
Which financial act did the application of ‘utmost good faith’ derive from?
The marine insurance Act 1906
This Act required a person applying for insurance to disclose information about everything that would ‘influence the judgement of a prudent insurer’.
4 key points that summaris the Consumer Insurance (Disclosure and Representations) Act 2012
The act came into frutition due to insurnace claims not being paid out due to concerns over discllosure - many insurers would unfairly come to the decision based on information not received that was not even relevant to the claim
- Provides better protection for consumers, who can no longer have claims rejected by
insurers if the insurer didn’t ask the consumer for all required information - Removed the requirement for utmost good faith in relation to insurance contracts
covered under the Act - Replaced the duty for consumers to disclose all material facts with a duty to take
reasonable care not to make a misrepresentation - Enables the insurer to take a range of actions (remedies) if a consumer makes a
misrepresentation.
What are the distinicitons between the nature of consumer dishonesty and misreprentation?
Consumer Insurance (Disclosure and Representations) Act 2012
- Honest and reasonable misrepresentation
-
Deliberate or reckless misrepresentation:
— deliberate misrepresentation is if the consumer acts with knowledge, ie knowing
they should disclose information but not doing so;
— reckless misrepresentation is if the consumer acts without care or regard for
the truth of an answer; -
Careless misrepresentation, where the consumer makes a statement they believe to
be true but without sufficient care to check the facts.
Consumer Insurance (Disclosure and Representations) Act 2012 key points
- Puts obligations on the consumer to disclose and represent accurately at the pre-contract stage
- Enables the insurer to take certain actions (Remedies) if customer does not meet their obligations
the consumer is expected to exercise a standard of care as would be expected of a reasonable person
What was the duty of utmost good faith replaced by? and in wich act?
- Duty of fair representation
Insurance terminology - What is the application for insurance known as?
The proposal
The applicant is therefore know as the proposer
Insurance terminology - if the life assured differs from the applicant, what basis is the policy said to be arranged on?
- Life-of-another
Insurance terminology - who is the life assured?
The person whose life or health is to be insured - may or may not be the applicant/proposer
What remedies can the insurer put in place if deemed that deliberate or reckless misrepresentation has taken place?
- Treat the contract as if it never existed
- Refuse all clains
- Retain all premiums paid (unless unfair to do so)
What happens if any misrepresentation is honest and reasonable?
The insurer cannot apply any remedy - they must pay the claim
In the event of careless representation…
The insurer bases their remedy on whether they would have entered the contract at all, given the correct information. They may then:
* If they would not enter the contract, refuse all claims but refund all premiums
* If they would enter the contract on different terms (e.g. lower cover), the different terms are taken as applying to the contract
The insurance act 2015
- Made similar changes to rules surround ‘utmost good faith’ and fair and honest representation but for non-consumer insurance contracts - i.e. for business protection
- The duty of utmost good faith was replaced with a duty of fair presentation.
Policy documentation - What is the KFI?
Key features illustration
* Usually involved when recommendations are presented to customer.
* Sets out key features of the plan that the customer is interested in
*The KFI is consumer-specific the KFD is generic
Policy documentation - What is the KFD?
Key features document
* Details generic features of the plan - how it works, what events are protected against, what happens if premiums cease
*The KFD is generic the KFI is consumer-specific
Other key documents other than the KFI and KFD
- Acceptance letter
- Cancellation notice
- Policy Document
What is underwriting? What factors are considered?
Underwriting is the process by which an insurance company decides whether it can accept a risk offered to it and if so, on what terms.
Key factors considered:
* Age
* Health (Morbidity - risk of sickness)
* Lifestyle and occupation** (Mortality - risks of death)**
* Occupation
* Enviroment of life proposed
* Financial situation of the life proposed
* Expected yield of company investments
* Expected sales and administrative costs of the policy
What factor is no longer legally allowed in be taken into consideration in the underwriting process? What legisilation?
- Sex
- EU Gender Directive
- Effecting new contacts since 21 Dec 2012
Historically, women benefitted from lower premiums due to their longer life expectancy
Occupation and income protection - Class 1 occupations and examples
Lowest risk
* Administative roles
* Clerical roles
* Professional roles
Examples - accountants and civil servants
Occupation and income protection - Class 3 occupations and examples
Occupations carrying moderate risk
* Risk from potential accident or health problems associated with occupation
* Farmers
* Electricians
Occupation and income protection - Class 2 occupations and examples
Occupations carrying some risk
* Possible risk rising from potential accident
* Hairdressers
* Industrial chemist
Occupation and income protection - Class 4 occupations and examples
Occupations with the highest risk
* Substantial risk of health problems
* High risk of accident
* Agricultural engineers
* Heating engineers
* Aerial erectors
Certain occupations will be excluded from cover on the basis that they represent too great a risk, at least as far as mainstream insureres are concerned - examples being oil rig workers, stunt workers or miners.
Additional occupational class (not 1,2,3,4)
Houseperson
* Based as class 1 - should anything happen to the houseperson, the household would be negatively affected finacially.
Underwriting decisions - Increased rates (3 types)
Increased rates are for those who would not normally be accepted - ordinary rates does not mean the life assured is in perfect health
Fixed loading - Increased premiums by a fixed amount throughout the policy or set term
Percentage loading - increased premiums by percentage
Add years or rate-up age - LIfe assured is treated as being older than they are based on the added morbidity/ mortality
What is a policy lien?
Instead of charging an increased premium, a debt against the policy is charged.
For example, a lien of £50,000 on a £100,000 would mean that the policy will be reduced by £50,000 on death - this can reduce each year by a set amount.
Policy exclusions
- An exclusion is a clause on the policy that prohibits payment of benefits in certain specified circumstances.
- Exclusions are more numerous on income protection and CIC policies.
Ownership of the policy - The policyholder
Responsible for paying the premiums
* Sum assured will be paid to policy holder unless other arrangements have been made
* Paid to the estate and dealt with under the terms of their will or laws of in
Ownership of the policy - The life assured
The person upon who the sum assured depends
* May or may not be the policy holder
* If they are - the policy is described as being on an own-life basis
* If they are not - the policy is decribed as being on a life-of-another basis and the rules of insurable interest apply
one advantage of a life-of-another policies is that the sum assured is not paid into the deceased’s estate (it is paid to the policy holder) so will not need probate to access
Ownership of the policy - Joint-life first death and Joint life second-death. What are they mainly used for>?
Joint-life first death
* Sum assured is paid on whichever death occurs first
* Normally joint policy holders
* Sum assured paid directly to the survivor
Joint-life second death
* Sum assured only paid out when the last survivor dies
* Main use is to pay IHT liablities
Definition of a trust? How can trusts be created for protection purposes?
A trust is a method for the owner of an asset (the settlor) to distribute the asset for the
benefit of a person or persons other than themselves (the beneficiary or beneficiaries),
without allowing the beneficiary to exert control over the asset.
- In life, instructed by the settlor
- On death, via a will
- Automatically, as a consequence of statutory provisions, such as a the laws of intestacy.
Advantages of trusts - Name 4
- IHT Planning
- Guaranteed destination for assets
- Prompt receipt of benefits
- Protection in the event of bankruptcy
Disadvantages of trusts - name 4
- Loss of ownership
- Complexity
- Lack of scope and flexibility
- Demands of appointing trustees
Types of trusts for protection policies - Statutory trusts - Married Women’s propert act trust 1882 key points
Benefits/potential use? What forms of policy are prohibited within this
- Really a ‘Spouses and Children’s Property Act’ as spouses and civil partners can set up the trust
- Simple to set up and administer
Potential use
* Benefit - protection of trust assets in the event of bankruptcy
Key Points
* Beneficiaries can only be the settlor’s spouse or the settlor’s own children.
Stepchildren and grandchildren are precluded.
* Life policies placed under this type of trust can only be single‑life, own‑life contracts.
Joint‑life or life‑of‑another policies are not permitted.
Types of trusts for protection policies - Absolute (bare) trust
Benefits/potential use with life policy?
- Simplest form of trust
- May be only a single beneficary - they are entitled to the assets absolutely
- The trustees have no obligations other than passing on assets when they have attained majority or a specified age
- inflexible - nature of interest and identity of beneficaries cannot be changed
Potential use
* Death benefits written in trust for the benefit of a child - trustee will claim proceeds from the insurance company and pass them on to the child (upon a certain age or otherwise) - this avoids the deceased estate and the need for probabte
Types of trusts for protection policies - Discretionary trust
Benefits/potential use with life policy?
- List of potential beneficaries created rather than specific
- Flexible form of trust
- Settlor hands responsiblity of choosing beneficaries to the trustees, and therefore loses control over who benefits and when.
Potential use
* Useful for when individual wishes to give away assets for the general benefit of the their family but no specific person or purpose in mind.
Types of trusts - Accumulation & Maintenance trusts
Benefits/potential use with life policy?
- Form of discretionary trust
- Prior to 2006, had preferential IHT treatment
- Beneficiaries become entitled to assets or income from trust by a **certain age **
- Trustees can accumulate income within the trust until beneficaries become entitled to it.
- Any income above the maintainence (income) can be retained.
Potential use
* Where provision for dependants is wanted but not to give full owernership or access to assets/funds
Types fo trust - Bereaved minors or 18 to 25 trusts
- Introduced in 2006
- Similar to A&M trusts
- Created through parents will for the benefit of their children
It can be created under the will of a deceased parent or step‑parent where the property
in the trust is held for the benefit of a** person aged under 25 **and the beneficiary will
become absolutely entitled to the whole of the property on or before their 25th birthday
Types of trusts - Interest in Possession (life interest)
- Beneficary has an immediate right to income or use of trust property
- If income entitlement is for the duration of their life then they have a life interest and is referred to as a life tenant
- On the death of the beneficiary, or possibly upon some other specified event (such as
marriage), the assets will pass to the ‘remaindermen’.
Potential Use
An interest in possession trust is particularly suitable when one parent wishes to provide
for another in the event of their death and also wishes to preserve capital for the children.
Types of trusts - Will Trusts
A will can be used to create a will trust but the trust will not come into effect until the testator dies.
As a will can be revoked at any time, the trust can also be revoked. A trust may be expressly created through a will or arise because the will specifies a gift to a minor.
