Chapter 5 - Post-Issue Policy Changes

Question 1

Key concepts providing an appropriate frame of reference when considering post-issue policy changes. These include

Answer 1

1. Contractual vs non-contractual policy provisions
2. Change in amount of risk
3. Insurability
4. Anti-selection
5. Customer/producer/company impact

Question 2

Contractual vs non-contractual policy provisions

Answer 2

Key among these contractual provisions for the purpose of post-issue transactions are those governing incontestability, grace period, and reinstatement, and for term policies, the conversion privilege.
Contractual - GI increases
Non-contractual - FA increases, smoker to non-smoker changes, risk reclassification - substd to std or std to preferred.

Question 3

Change in amount of risk

Answer 3

Distinguish between the a change in FA and in the amount of risk.
Sometimes an increase in FA does not increase the risk such as going from plus premium to level.

Question 4

Insurability

Answer 4

When the policy change is not a contractual obligation, any change in insurability and the evidence needed to evaluate that change will likely be factors to consider.
Can also look for positive changes in health.
Requirements will be similar to those for new business cases.

Question 5

Anti-Selection (Adverse selection)

Answer 5

The adverse impact upon insurers that occurs when insured’s select insurance coverage for only those risks that are likely to generate losses.
Such selection on the part of the proposed insured can be accompanied by an intent to withhold from the insurer pertinent information related to an adverse change in insurability.

Question 6

Customer/Producer/Company Impact

Answer 6

Reviewing policy change and the impact on the customer, producer, and company relationship. Factors such as:

1. Demographics (upper/lower income)
2. Type of producer relationship (captive vs broker)
3. Business structure of the insured (stock vs mutual)
4. Company philosophy

Question 7

Changes that would not require underwriting

Answer 7

Address change, name changes due to marriage, modal premium changes, beneficiary and/or ownership changes (in many cases), the exercise of a GI rider, and the conversion of a term policy.

Question 8

Contestability Period

Answer 8

With few exceptions, life insurance policies have a two year contestability period, during which the validity of the policy contract can be contested by the insurer to material misrepresentations.

Question 9

Material Misrepresentation

Answer 9

Are statements made that are false, which, had the truth been disclosed, would have resulted in a less favourable risk class then was issued.

Question 10

Policy changes and contestability period

Answer 10

If the policy change is undertaken during the first 2 policy years, adverse information can come to light that suggests it may have predated the issue date and was not divulged at that time. This situation should be appropriately investigated to determine whether or not the policy should be contested. Failing to do so puts the company at increased risk d/t possible under-pricing, but also essentially waives the right to contest the policy later if a death claim occurs before expiration of the contestability period.
Second, if the policy change occurs after the 2 year contestability period a new contestable period can start with respect to the current transaction. (i.e., increase FA - would result in a contestability period for the increase not the original amount.
Spouse rider - would have a contestability period.

Question 11

Reinsurance Implications

Answer 11

Business the has been reinsured on an automatic basis (either excess retention or quota-shared) will have a reinsurance treaty provision permitting the ceding company to independently make the decisions necessary to process the post-issue policy changes.
FAC reinsured - these cases require that nay post-issue policy change that materially affects the reinsurers’ share of the business must have the reinsurer’s concurrent approvals.

Question 12

Conversions

Answer 12

Most term policies include a provision permitting conversion to permanent products without evidence of insurability if requested within a set time frame, typically by an age, such as 65 to 75, or within a set duration, such as 10 to 20 years.
When converting, the risk class for the new policy is the same or comparable to the term policy.

Question 13

Evidence could be required on a conversion when

Answer 13

An increase in face amount
Individual term policy added
Spouse rider
Better risk class

Question 14

Re-entries

Answer 14

Term insurance policies that have reached the end of their period coverage and are being considered for renewal.
Premium now reflects the new older age of the insured and no current underwriting.
However some will permit the insurer to provide current evidence of insurability in order to qualify for more favourable premiums - equal to A&A although some will minimize requirements.

Question 15

Guaranteed renewable term

Answer 15

A renewal that can be completed without evidence

Question 16

1035 Internal Exchanges

Answer 16

Internal Revenue Service allows you to exchange an insurance policy that you won for a new life insurance policy insuring the same person without paying tax on the investment gains earned on the original contract. Can be an internal or external replacement.

Question 17

Several reasons why a new policy under 1035 exchange has increased risk

Answer 17

1. COI’s will reflect actuarial pricing that is based on the expectation of new business w/ full underwriting evidence providing more favourable mortality.
2. It is possible that the new premium needed to carry the policy can be less than the premium on the existing policy, despite the insured’s now older age. As a result, although the insurer will have the same death benefit risk, its net amount at risk can be more.
3. If the insured’s health has adversely changed in the interim, the exchange can represent an even greater risk.
   Therefore they typically require the same evidence as new business.

Question 18

Reinstatements

Answer 18

Is the process by which a life insurance company puts back in force a life insurance policy that has either
(1) been terminated because of nonpayment of renewal premiums, or
(2) been continued under the extended term or reduced paid up insurance non-forfeiture option.
Typical time frames are between 2-3 years.

Question 19

Request for reinstatement

Answer 19

Involves completion of a reinstatement application - usually much simpler than new business application. Any additional requirements needed for evidence of insurability are at the discretion of the underwriter, unless it has been FAC reinsured.

Question 20

Unlike new business, requirements for reinstatements will depend on such factors as

Answer 20

1. Was it FAC reinsured
2. Policy FA
3. Current policy values
4. Age of the proposed insured
5. Duration policy had been in force
6. Duration it has been lapsed
7. Whether or not there have been prior lapses and reinstatements of this same policy
8. Disclosed health history on the reinstatement application.

Question 21

Contestability period for reinstatement

Answer 21

Will begin anew if the policy is reinstated, though only with respect to any misstatements that have been made in the reinstatement application.

Question 22

Change in health for reinstatement

Answer 22

It is common to absorb two to four tables of extra mortality for policies long in force and with short duration of lapse. The justification for this action is that it keeps the case on the books and continue premium income that the company would otherwise lose. An additional consideration in this regard is whether the policy values are high, such as with traditional whole life policy and whether or not the remaining amount at risk is modest.
FAC shopped - reinsurance to make final decision.
If higher risk - reinstatement must be declined as you cannot reinstate at a higher risk class than the original.

Question 23

Death Benefit Increases

Answer 23

A request for increasing the policy death benefit is typically handled just like new business, with evidence based on the insured’s attained age and the amount of the increase.

Question 24

Plan Benefits and/or Riders (such as term riders, annual renewable and convertible term rides, CTB, TDB, WP, and others)

Answer 24

The requirements needed to establish evidence of insurability will vary depending upon the specific rider and the insurers risk tolerance.
WP and TDB - the risk is of morbidity and not mortality.

Question 25

Rate Class Reductions

Answer 25

Tobacco to non-tobacco
Changes on Second to Die policies
Standard to Preferred (Good to better)
Medical substandard reductions
Nonmedical substandard reductions

Question 26

Tobacco to non-tobacco - Juvenile

Answer 26

It is not uncommon for policies issued on juveniles to use aggregate rates for the standard class, meaning rates that are no tobacco distinct. However, these policies are issued with the expectation and understanding that once these juveniles reach adulthood, they can have the option to qualify for non-tobacco rates.
If done once they qualify the evidence is kept to a minimum (signed statement).
If delayed substantially (1 yr or more) then the protective value of a cotinine test is more demonstrable.

Question 27

Tobacco to non-tobacco - Individual life issued to adult tobacco users

Answer 27

Typically minimum requirement will be a statement of non-tobacco use, MIB check and a urine specimen with cotinine test.
For some insurers this will be enough even with an adverse change in health. Reasoning being the insurer is already on the risk and the insurer has proactively improved their risk.
Another way of thinking is to accept it UNLESS the adverse change is related to smoking (CAD, PVD, etc).

Question 28

Changes on Second to die policies

Answer 28

Even if Insured A has quit smoking and is in “better health”, insured B may be in worse health. There is no obligation to reduce the premium being received. Therefore such change on one life may require evidence on both lives in order to determine the change to be made.

Question 29

Standard to Preferred (Good to Better)

Answer 29

Was the more favourable class available at the time the policy was issued - insurers vary if they should qualify if it was not offered at the time of application as this may deteriorate the original block of business of which the policy was a part of, since those who qualify will be considered part of a new block and those remaining will tend to be poorer risks as a group.
Although denying may result in the client going elsewhere.
Keep requirements to a minimum necessary.

Question 30

Medical Substandard Reductions

Answer 30

Economic incentive on the part of the insurer to keep requirements to a minimum. Unlike moving to favourable risk the requirements needed are generally fewer. Usually policy change app, MIB, and APS record.
If FAC reinsured - then needs to be reviewed by reinsurer.
Contestability period starts anew from the date of the rate reduction for representatives made in the policy change applications.

Question 31

Nonmedical Substandard Reductions (Occupations, Aviation, Avocation, Habits, and foreign travel/residence

Answer 31

Requirements are usually even fewer then medical substandard reductions. Evidence might only consist of a policy change application, MIB and current questionnaire.
However might not be engaging in activity d/t an adverse change in health. Therefore APS may be needed.

Question 32

Nonmedical Substandard Reductions - Aviation

Answer 32

Often the basis of the change is that the insured no long pilots plans, consider if merely remove the aviation extra or replace it with an aviation exclusion rider. Factors to consider are:

1. language used in the exclusion and whether or not it might unintentionally exclude the risk of being a passenger only.
2. Whether or not the insured still holds a valid pilot’s license.
3. Whether or not the insured has sold his or her plane
4. How long it has been since the insured last piloted a plane.

Question 33

Ownership and Beneficiary Changes

Answer 33

Contractual right of the policyholder -therefore generally no need for underwriting.
However:
“stranger - or investor-owner life insurance” (STOLI, SOLI, and IOLI). Sometimes life settlements are being abuses with negative consequences for insurers and insured’s.

Question 34

Ownership and Beneficiary Changes Triggers

Answer 34

Changes occurring shortly after the policy is issued. Usually on older age insured’s and large amount policies.

Question 35

Ownership and Beneficiary Changes Underlying concerns

Answer 35

Fraud as to the original purchase, possible misrepresentation on one or more questions on the app that related to the issue of premium financing, possible nondisclosure of material information regarding the health of the insured, and/or falsification of the financial information presented.