Ch. 5 Flashcards
Adverse selection
Adverse selection in life insurance occurs when high-risk individuals, who are more likely to need insurance benefits, are more inclined to purchase policies, while low-risk individuals are less likely to do so. This can lead to higher claims for insurers, potentially resulting in increased premiums for everyone. Insurers try to manage this risk through careful underwriting and assessments
Age change
In life insurance, “age change” refers to the point when an insured person is considered to have reached their next age for policy purposes
Applicant
person completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case
Application
Statement of information given when a person applies for life, health, or disability insurance. The insurance company’s underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company’s guidelines. Applications are attached to and made a part of all individual contracts
Attending physician statement (APS)
these are used when the application or medical examiner’s report reveals conditions or situations, past or present, about which more information is desired. Because of Physician/Patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company underwriter
Binding receipt (Unconditional receipt)
a death claim will be paid whether or not the applicants application is approved by the underwriter
Backdating
making the effective date of a policy earlier than the application date. Backdating is used to make the issue age lower than an applicant’s real age in order to get a lower premium. State laws usually limit the time to which policies can be backdated to six months. Backdating is not allowed in variable contracts due to the nature of the investment
Buyer’s guide
a pamphlet that describes and compares various forms of life or health insurance. This guide must be provided to a consumer by the producer when the latter is attempting to solicit insurance. This guide makes information available to the consumer that helps them make an informed decision when purchasing insurance coverage
Consumer report (Investigate consumer report)
a detailed background investigation that may include an interview with coworkers, friends, and neighbors about an applicant’s character, reputation, lifestyle, etc.
Conditional receipt
a death claim will NOT be paid if the application is declined by the underwriter
Credit report
a summary of an insurance applicant’s credit history
Declined risk
an individual whose application for coverage was rejected by an insurance company
Disclosure form
comparison form required by various state regulatory agencies to be given to every policyowner when replacing an existing policy with another
Evidence of insurability
a statement or proof of a person’s health history and current health status that qualifies that person for coverage
Fair Credit Reporting Act
a federal law passed in 1970 that provides an insurer with the right to receive additional information with regard to applicants for insurance coverage. This law permits an insurer to conduct a consumer report on applicants and proposed insureds. An applicant for insurance must be informed of the purpose of the report. Suppose coverage is declined due to information in the report. In that case, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report
Field underwriter
the agent or producer completing the applicant’s application for insurance
Free-look period
All life insurance policies must include at least a ten-day free-look period in a life insurance contract. This period begins when the producer delivers the insurance policy. If the policy owner decides to return the contract to the insurer during this period, they will receive a full premium refund. Mail order or direct response insurers must include a free-look period of at least thirty days
Inspection report
a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service
Insurable interest
the legal requirement that the policyholder must have a financial or emotional interest in the continued life of the person being insured. This means that the policyholder would suffer a financial loss or hardship if the insured person were to pass away. Insurable interest is necessary to prevent people from taking out life insurance policies on individuals without a legitimate reason, which helps to avoid potential abuses or fraud
Medical information bureau
a service organization that collects medical data on life and health insurance applicants for member insurance companies
Policy summary
summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term care insurance, and annuities
Preferred risk
an applicant who represents the likelihood of risk lower than that of the standard applicant, typically due to better than average physical condition, occupation, mode of living, and other characteristics compared to other applicants of the same age
Proposed insured
the person whose life is requesting to be insured. Typically, but not always, this is also the applicant
Rated policy (Rating up)
the basis for an additional charge to the standard premium because the person insured is classified as a higher-than-average risk
Replacement
refers to the process of substituting an existing life insurance policy with a new one. This can involve canceling the old policy and buying a new one, or converting an existing policy into another type within the same company. The replacement is often done to secure better terms, lower premiums, or more appropriate coverage. However, it can also carry risks, such as losing benefits from the original policy, facing new contestability periods, or paying higher premiums due to increased age or changes in health. Because of these risks, insurers often have regulations in place to ensure that policyholders fully understand the implications of replacing a policy
Representations
Most State laws specify that the applicant’s statements on the application are considered representations and not warranties. A representation need only be substantially accurate to the best of the applicant’s knowledge. Generally, a representation is considered to be fraudulent if it relates to a situation that would be material to the risk and that the applicant made with fraudulent intent
Risk Classification
describes the underwriting category into which risk is placed depending upon the applicant’s susceptibility to injury, illness, or death
Special class
refers to a rating category assigned to applicants who present higher risks due to factors like health conditions, lifestyle choices, or dangerous occupations. These individuals may not qualify for standard or preferred rates because their risk of mortality is higher than average. As a result, they may still be offered coverage, but typically at a higher premium to account for the increased risk
Standard risk
according to a company’s underwriting standards, is considered an average risk and insurable at standard rates
Substandard risk (Impaired risk)
describes an applicant whose physical condition does not meet the usual minimum standards. If the substandard classification is due to adverse health, the application may be declined or written with a “rated-up” premium. An applicant may be in excellent health but considered substandard due to their activities, hobbies, or avocations (i.e., scuba diving, skydiving, etc.)
Underwriter
a person who identifies, examines, and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate
Underwriting
the analysis of information obtained from various sources pertaining to an applicant for insurance and the determination of whether or not the insurance should be issued as requested, offered at a higher premium, or declined
Warranties
Most State laws specify that the applicant’s statements on the application are considered representations and not warranties. A warranty must be absolutely and literally true
Law of large numbers
mathematical law of probability that states the larger the number of occurrences, the more predictable losses will be
Part one of life insurance application
General applicant information
Part two of life insurance application
Medical and Health history
Part three of life insurance application
(The Agent’s report or statement) includes additional information about the applicant’s financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant
What is considered a minor in life insurance contracts
Anyone under the age of 15
Three types of risk classification
Preferred, standard, substandard
