Ch. 5

Question 1

Adverse selection

Answer 1

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

Question 2

Age change

Answer 2

In life insurance, “age change” refers to the point when an insured person is considered to have reached their next age for policy purposes

Question 3

Applicant

Answer 3

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

Question 4

Application

Answer 4

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

Question 5

Attending physician statement (APS)

Answer 5

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

Question 6

Binding receipt (Unconditional receipt)

Answer 6

a death claim will be paid whether or not the applicants application is approved by the underwriter

Question 7

Backdating

Answer 7

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

Question 8

Buyer’s guide

Answer 8

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

Question 9

Consumer report (Investigate consumer report)

Answer 9

a detailed background investigation that may include an interview with coworkers, friends, and neighbors about an applicant’s character, reputation, lifestyle, etc.

Question 10

Conditional receipt

Answer 10

a death claim will NOT be paid if the application is declined by the underwriter

Question 11

Credit report

Answer 11

a summary of an insurance applicant’s credit history

Question 12

Declined risk

Answer 12

an individual whose application for coverage was rejected by an insurance company

Question 13

Disclosure form

Answer 13

comparison form required by various state regulatory agencies to be given to every policyowner when replacing an existing policy with another

Question 14

Evidence of insurability

Answer 14

a statement or proof of a person’s health history and current health status that qualifies that person for coverage

Question 15

Fair Credit Reporting Act

Answer 15

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

Question 16

Field underwriter

Answer 16

the agent or producer completing the applicant’s application for insurance

Question 17

Free-look period

Answer 17

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

Question 18

Inspection report

Answer 18

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

Question 19

Insurable interest

Answer 19

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

Question 20

Medical information bureau

Answer 20

a service organization that collects medical data on life and health insurance applicants for member insurance companies

Question 21

Policy summary

Answer 21

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

Question 22

Preferred risk

Answer 22

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

Question 23

Proposed insured

Answer 23

the person whose life is requesting to be insured. Typically, but not always, this is also the applicant

Question 24

Rated policy (Rating up)

Answer 24

the basis for an additional charge to the standard premium because the person insured is classified as a higher-than-average risk

Question 25

Replacement

Answer 25

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

Question 26

Representations

Answer 26

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

Question 27

Risk Classification

Answer 27

describes the underwriting category into which risk is placed depending upon the applicant’s susceptibility to injury, illness, or death

Question 28

Special class

Answer 28

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

Question 29

Standard risk

Answer 29

according to a company’s underwriting standards, is considered an average risk and insurable at standard rates

Question 30

Substandard risk (Impaired risk)

Answer 30

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.)

Question 31

Underwriter

Answer 31

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

Question 32

Underwriting

Answer 32

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

Question 33

Warranties

Answer 33

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

Question 34

Law of large numbers

Answer 34

mathematical law of probability that states the larger the number of occurrences, the more predictable losses will be

Question 35

Part one of life insurance application

Answer 35

General applicant information

Question 36

Part two of life insurance application

Answer 36

Medical and Health history

Question 37

Part three of life insurance application

Answer 37

(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

Question 38

What is considered a minor in life insurance contracts

Answer 38

Anyone under the age of 15

Question 39

Three types of risk classification

Answer 39

Preferred, standard, substandard