Chapter 2 Flashcards
What is underwriting?
The process of evaluating a risk to determine if it is acceptable based on established insurance company guidelines
In the underwriting process, what is the agent frequently referred to as?
The “field underwriter”
what is the first part of the underwriting process for the producer/agent?
Completing the application - with an eye toward (1) confidentiality (2) accuracy (3) and completeness
What are the 3 components of completing the application in the underwriting process?
- Confidentiality
- Accuracy
- Completeness
What is confidentiality?
Personal information is required during the process - agents need to inform applicants that the information they share will be kept confidential
If you make a change to an application due to mistakenly recording applicant information, what process needs to be done (note - this would be a correction to ensure accuracy)
Applicant must certify that an error occurred and place their initials next to the correction - some insurers also require the producer to initial any change
If a policy is issued and the application was incomplete, the underwriter, on behalf of the company, has effectively done what?
Waived the right to that information - if a claim arises, the company cannot deny it based on the fact that information was missing from the application
Some insurers allow an application to be backdated so that the premium can be based on an applicant’s earlier age and lower the cost of the premium
Note
Backdating would permit a 41-year old applicant to purchase a life insurance policy using the age of 40
Note
How far back do most states allow backdating?
6 months
If an application is backdated, the policy becomes effective as of when?
the date requested on the application
With backdating, to receive the less expensive premium, must the applicant pay any additional premiums that would have been paid from the backdate?
Yes
Several documents must be signed to complete the application process.
Who must sign the application form?
Applicant and producer/agent
Proposed insured must sign if applicant is not the insured
Company officer must sign a corporation owned policy
Parent/legal guardian signs a juvenile policy for the minor
If the applicant isn’t the insured, who must sign the application?
The proposed insured
Part 3 of a life insurance application is the producer/agents report or “producer’s statement” - what is recorded here?
information that pertains to the proposed insured including the producer’s relationship with the proposed insured and anything the producer knows about the proposed insure’s
- Financial Status
- Habits
- Character
Does the proposed insured see the producer’s report?
No - it is attached to the policy and application when it is issued - it is attached to the policy and the application when it is issued - The producer’s report will be signed only by the producer
Must the life insurance producer comply with the requirements for notifying applicants about the insurer’s private policy as it relates to the personal information collected during the application process and how it will be used?
Yes
State laws require that applicants be given advance written notice stating who is authorized to disclose personal information, the kind of information that may be disclosed, and the reason it is being disclosed - note
Note:
- Who (who is authorized to disclose the personal information)
- What (the kind of information being disclosed)
- Why (the reason it is disclosed)
When is the “offer to buy” said to exist?
An “offer to buy” insurance is said to exist when the first premium is submitted with the insurance application
If no premium is submitted with an application, then what occurs?
Coverage is delayed until the premium is paid for the issued policy
If the insured dies between the time when the application is submitted and the first premium is paid, will the policy pay a benefit?
No
When the first premium is collected at the time of application, the producer must provide what to the applicant?
A receipt - the effective date of coverage will depend on the type of receipt issued
The type of receipt issued in accordance with a first premium and application dictates when coverage will begin and under what constraints - what is a conditional receipt and when will coverage begin?
A conditional receipt is a receipt where, as long as the applicant is found to be insurable under the company’s standard underwriting rules, the date of application (or medical exam if required - whichever is later will be the effective date
The type of receipt issued in accordance with a first premium and application dictates when coverage will begin and under what constraints - what is a binding receipt and when will coverage begin?
Binding receipts are effective 30 to 60 days from the date of application even if the applicant is found to be uninsurable
Are binding receipts often used with life insurance?
No - generally with auto-or homeowners, not life
If life insurance is under a binding receipt agreement, what is it called?
A “Temporary Insurance Agreement”
With a binding policy, the insurer can either issue a policy or cancel the binder before the end of the stated period - t/f?
True
The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurer
Note - the application is the underwriter’s sole source of information
The application used to purchase life insurance asks the applicant for basic information - what are the 3 main parts of an application?
- General information
- Health Information
- Producer’s Report
If the applicant is someone other than the insured, should the applicant’s name and address also be requested?
Yes
What are some of the things on the first “GEneral information” section of the application?
- Name
- Address
- DOB
- Gender
- SSN
- Driver’s License #
- Marital Status
- Income
- Occupation + business Address
- TYpe of policy and face amount being applied for
- Beneficiary
- other Insurance owned
What are some of the things on the second portion of the application - focused on health?
- Height + Weight
- Tobacco
- Drug
- International Travel
- Current Medical Treatment
- Medications being taken
- Conditions the insured has sought treatment for
- History of Disability Claims
- Health Conditions prevalent in family
- High-risk hobbies
- Name and address of current physician
an underwriter may ask for what from your physician?
- attending physician statement (APS)
2. Copies of Medical records
When will insurers underwrite an application on a non-medical basis?
When the death benefit applied for is below a certain level (in this case, just use the application information)
Does the insurer generally require the proposed insured to take a medical examination for larger death benefit amounts?
Yes
Does the insurer pay for medical exams that are required during the underwriting process?
Yes
Who can conduct medical testing for underwriting?
A registered Nurse, paramedic, and some applications require a physician with various tests - the amount of death benefit determine the testing
Can sexual orientation be asked during the underwriting process?
No
Can questions regarding AIDS and ARC to determine medical condition be asked?
Yes
Might AIDS testing be required with the applicant’s written consent? What must they be informed of though?
Yes - they must be informed about the purpose of the test and that the results are reported to the insurer
If results of an AIDS or ARC test are positive, where are they reported?
The medical information bureau (MIB) - that an individual had abnormal blood test results
Is the presence of AIDS ever revealed, reported, or shared?
No - it can only be released to persons designated by an applicant, such as a particular physician
WHo pays for AIDS tests?
The insurer
If the applicant does not designate a medical provider after an AIDS test, state law may require what?
That the results of an AIDS test be forwarded to the State’s Department of Health
The Health Insurance Portability and Accountability Act (HIPAA) imposes specific requirements on the disclosure of insureds’ health information to medical providers, insurers, and producers. Under HIPAA, health information must remain confidential to protect an applicant’s privacy. If any health information will be shared, applicant’s must be given full notice of what 3 things?
- The insurer’s information sharing policies
- Their right to maintain privacy
- An opportunity to refuse to have their information released
What is the Medical information bureau (MIB)
A non-profit insurance trade organization that maintains underwriting information on applicants
If you apply for coverage, and the insurance company is a MIB member, data regarding conditions will be stored in the MIB data base under codes - if the applicant applies for insurance elsewhere, other members companies will have access to this information
Note
What are some items passed to the MIB?
- Hazardous Jobs or hobbies
- Medical history
- Poor driving records
May insurers make an adverse underwriting decision based solely on the information from the MIB?
No - only to further their investigation
Do insurers report underwriting decisions to the MIB?
No
Must an applicant be given written notice that information may be reported to and obtained from the MIB?
Yes
Must an applicant provide written authorization for information to be delivered to the MIB?
Yes
Must applicants also be notified that applying for insurance or filing a claim with another company may trigger the release of MIB information?
Yes
Consumer reports are used to determine what?
A consumer’s eligibility for credit, or insurance, or for employment
May consumer reports (credit, insurance, or employment) only be delivered to persons who have a legitimate business need for the information
Yes
Do underwriters use credit reports?
Yes - consistency of payment in premium is important
What are investigative consumer reports?
Reports containing information obtained by interviewing individuals who know something about the consumer, such as associates, friends, and neighbors
In the case of investigative consumer reports, must consumers be notified and give their consent to having investigative consumer reports done?
Yes
In the insurance industry, what are investigative consumer reports also called?
Inspection reports
What are the 4 classifications of applicants?
- Preferred (excellent health - above average expectancy) - preferred or discounted rates
- Standard (average health - normal life expectancy) - standard rates
- Sub-standard or Rated (below average health - high-risk life) - higher rates
- Declined (not insurable at any price)
Substandard risks are often referred to as what?
Being “rated up” - sometimes just shortened to “rated”
How are substandard risks often priced in to contracts?
One or a combination of
- Flat charge
- Higher premiums
- Lower benefit
Insurers may not unfairly discriminate between individuals in the same risk class - specificially, with respect to what 6 factors
- Race
- Religion
- national origin
- Place of residence (the area where someone lives)
+Mome states: - Blindness
- Domestic Violence Victims
When a policy is issued, it must be delivered to who?
THe policyowner
A policy can be mailed when issued to the policyowner, but for most companies, it is the responsibility of who to deliver it in person?
The producer
In some states, must producers, upon delivery of a newly issued policy obtain a receipt from the policyowner acknowledging what?
That the policy was delivered on the date
During the deliver appointment between the producer and policyowner, the producer should do what?
- Review the policy, riders, exclusions, and other details to make sure they understand it
- Answer any pertinent questions the policyowner has about the policy they purchased
During the delivery appointment, the agent/producer must collect what if not yet already collected?
The first premium (if not paid at the time of application)
At deliver of the policy by the agent, what must the policyowner sign? (only required if no premium with application)
A statement of good health - attesting that their health is the same as when they applied for the policy (required if no premium with application)
If health has changed, can the agent deliver the policy?
No
When the first premium was required with the application for a policy, when is the effective date of the policy?
The date of the application or the date of the medical exam (if it was required)
If the proposed insured is found to be of substandard risk, the policy that is issued will require substandard/higher premiums because the initial application for insurance was forwarded with a standard premium
Note -
- If the applicant denies the substandard policy and does not pay the additional premium, coverage has never been in effect
- If the applicant accepts the substandard policy and pays the additional premium, the effective date of coverage is the date the policy was issued
If an application for insurance is sent to the insurer without the first premium, but it is paid at policy deliver, when is the effective date of coverage?
The date the policy was issued
What is the federal Fair credit reporting act?
The federal Fair credit reporting act requires consumer reporting agencies to adopt reasonable procedures for exchanging information on credit, personnel, insurance, and other subjects in a manner that is fair and equitable to the consumer with respect to confidentiality, accuracy, relevancy, and proper use of this information
Must all insurers and their producers comply with the federal Fair Credit Reporting Act regarding information obtained from a third party concerning the applicant?
Yes
Reports on consumers are prohibited unless the consumer is made aware that an investigative consumer report may be made, and that such report may contain information about the person’s character, reputation, personal characteristics, and lifestyle
Note
What is a “Notice to Applicant”
Must be issued to all applicants for life and health insurance coverage - This notice informs the applicant that a report will be ordered concerning their past credit history and other life or health insurance for which they have previously applied.
Must the agent leave the “Notice to Applicant” with the applicant along with the receipt?
Yes
With respect to the “Notice to Applicant” what two things must occur?
- The notice must be given to the consumer given to the consumer no later than 3 days after the report was requested
- A consumer may make a written request for a complete disclosure of the nature and scope of the investigation underlying the report
i. Disclosure must be made in writing within 5 days after the date on which the consumer’s request was received
What are consumer rights with respect to credit reporting?
Consumers who feel that information in their files is inaccurate or incomplete may dispute the information, and reporting agencies may be required to reinvestigate and correct or delete information. Insurance companies may use consumer reports, or investigative consumer reports, to compile additional information regarding the applicant. If applicants feel that the information compiled by the consumer inspection service is inaccurate, they may send a brief statement to the reporting agency with the correct information
What is the maximum penalty for obtaining consumer information reports and violating the fair credit reporting act?
$5,000, imprisonment for one year, or both
Producers are liable for their mistakes, including misstatements and promises of coverage - they must take special care to follow established procedures when:
- Taking Applications
- Explaining Coverages
- Collecting Premiums
- Amending Policies
- Submitting Claims
Stranger-Owned Life Insurance (STOLI) or Investor Owned Life Insurance (IOLI) transactions are life insurance arrangements that involve investors who persuade seniors to take out a new life insurance policy, with the investors named as the beneficiary
Note
What is the process by which stranger-owned life insurance and investor owned life insurance occurs?
Investors loan money to the insured to pay the premiums for a specified time period. Often times, this is two years based on the life insurance policy’s contestability period. After that period, the insured names the investor as beneficiary of the policy - Seniors generally receive some financial inducement for this arrangement: an upfront payment, a loan, or small continuing interest in the policy death benefit
Are many states banning STOLI transactions?
Yes - because the investor as beneficiary does not have insurable interest in the insured and it has become a method of fraud targeted at senior citizens
What is the overall purpose of the USA Patriot Act?
To deter terrorist activity, both globally and in the US - one of the ways it does that is to prevent and prosecute money laundering
In accordance with the USA Patriot Act, insurers must have controls for dealing with potential Money Laundering activities - what are 5 suspicious activities that insurers should be aware of?
- Receipt of any cash payment in excess of $10,000
- Purchase of insurance inconsistent with needs
- Requests to have refund or surrender paid to a party not clearly related to the purchaser
- Greater interest in early termination features of product that performance
- Fictitious identification or reluctance to provide identification + maximum borrowing against value soon after purchase
What is ERISA?
ERISA was enacted to protect the interests of participants in employee benefit plans as well as the interests of the participant’s beneficiaries
Does much of the ERISA law apply to qualified pension plans?
Yes - but some sections apply to group insurance plans
ERISA mandates very detailed standard for fiduciaries and other parties in interest of employee welfare benefit plans, including group insurance plans. This means that anyone with control over plan management and plan assets of any kind must discharge that fiduciary duty solely in the interests of the plan participants and their beneficiaries.
Note - also note, strict penalties are imposed on those who do not fulfill this responsibility
ERISA requires that certain information concerning any employee welfare benefit plan, including group insurance plans, be made available to plan participants, their beneficiaries, the department of labor, and the iRS
Note
What is some of the information must be distributed according to IRS to plan participants, their beneficiaries, the department of labor, and the iRS?
- Summary plan description to each participant and the DOL
- Summary of modifications to each plan participant and DOL
- Annual return or Report submitted to IRS
- Summary annual report to each participant
- Terminal Report to IRS
ERISA is for the benefit of who?
participants in employee benefit plans
What are 2 examples of plans for which ERISA applies?
Qualified pension plans and group insurance
