Chapter 7

Question 1

Adverse Selection

Answer 1

Adverse selection refers to situations in which an insurance company extends insurance coverage to an applicant whose actual risk is substantially higher than the risk known by the insurance company.

Question 2

Age Change

Question 3

Attending Physician Statement (APS)

Answer 3

Also known as an 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 allowing the physician to release information to the insurance company underwriter.

Question 4

Binding Receipt (Unconditional Receipt)

Answer 4

Binding Receipts are also known as unconditional receipts. It is one of the types of receipts an insurance company gives upon the completion of an insurance application if the initial premium is collected with the application. Insurance becomes effective on the receipt date and continues for a specified period or until the insurer declines the application.

Question 5

Buyer’s Guide

Answer 5

A Buyer’s Guide is a pamphlet describing and comparing various life or health insurance forms. The producer must provide this guide to a consumer when the latter attempts to solicit insurance. The guide provides information that helps the consumer make an informed decision when purchasing insurance coverage.

Question 6

Declined Risk

Answer 6

Declined risk describes an individual whose application for coverage was rejected by an insurance company.

Question 7

Disclosure Form

Answer 7

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

Question 8

Free-look Period

Answer 8

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 9

Preferred Risk

Answer 9

Preferred risk describes an applicant who represents a lower likelihood of risk 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 10

Representations

Answer 10

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 11

Warranties

Answer 11

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. A breach of warranty may be sufficient to void the policy whether or not the warranty is material and whether or not such breach of warranty had contributed to the loss.

Question 12

principle of indemnity

Answer 12

One’s insurable interest should be limited to the amount required to “return an insured to whole” after suffering a loss. The insured should be returned to the same financial condition they were in before the loss, no better, no worse. Indemnity is a simple concept for property insurance; the insured should “return to whole” when the damaged or destroyed property is repaired or replaced.

For example, if Elizabeth owned a home for $250,000, she could acquire a homeowner’s insurance policy for up to $250,000 to replace the home if there was a total loss.

Question 13

What is a Pure risk?

Answer 13

Pure risk refers to risks that are beyond human control and result in a loss or no loss with no possibility of financial gain. Fires, floods, and other natural disasters are categorized as pure risk, as are unforeseen incidents, such as acts of terrorism or untimely deaths

Question 14

What is the Law of Large Numbers?

Answer 14

This mathematical law of probability states that the larger the number of occurrences (i.e., the number of lives covered), the more predictable losses will be.

If an insurance company insures 1,000,000 people, it can use actuarial tables (built on historical data) to estimate that 1% of the population will pass away each year. The Law of Large Numbers ensures that the actual number of deaths will be very close to this estimate, reducing uncertainty and making it easier to manage risks and financial obligations.

In summary, the Law of Large Numbers enables life insurance companies to predict future claims more accurately and efficiently, ensuring stable operations and fair pricing for policyholders.

Question 15

What is field underwriting?

Answer 15

Field underwriting is the process of a life insurance producer assessing or gathering meaningful information about a prospect’s insurability on the spot or “in the field.”

A field underwriter or producer may solicit appointments, complete applications, collect premiums, and submit applications to the home office underwriter. The producer does not issue the policy.

Question 16

What is the underwriting process?

Answer 16

An underwriter’s primary duties are to assess risks (i.e., applications), approve or decline applications, determine premiums, and protect the insurer against adverse selection. Underwriters have several sources of underwriting information to help them develop an applicant’s risk profile.

Question 17

What are the Disclosures?

Answer 17

As in many states, an agent must deliver a Life Insurance Buyer’s Guide and a Policy Summary to the applicant. These documents are usually delivered before the agent accepts the applicant’s initial premium.

Question 18

What are the parts of the application?

Answer 18

Part I: General Applicant Information,
Part II: Medical and Health History
Part III: The Agent’s Report or Statement. The agent provides 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 19

What are representations?

Answer 19

Representations are statements an applicant makes that are substantially true to the best of the applicant’s knowledge and belief but are not warranted to be exact in every detail.

Question 20

What is a warranty?

Answer 20

The warranty is the statement made by the applicant, and it’s guaranteed to be true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.
Therefore, the statements made by an applicant which are recorded on the application are considered to be representations and not warranties.

Warranties are required for home or auto insurance where all the facts are known. However, in life insurance, the health details need to be true to the applicant’s best knowledge.

Question 21

Can minors (under 18) sign the application?

Answer 21

Concerning life insurance contracts, most states consider anyone under fifteen to be a minor. Typically, proposed insureds aged fifteen or older (sixteen in Indiana) can sign and enter into a contract for life insurance. Many companies still require a parent or guardian’s signature if the proposed insured is under eighteen.

Question 22

Who can change the application?

Answer 22

Applicants can change the application and must sign it again after changing the information. If the producer alters or changes the application information in any way without informing the applicant or insurer, he or she may be engaging in fraud.

Question 23

What is a trial application?

Answer 23

The application submitted without the premium is called a trial application.

Question 24

Conditional Receipt

Answer 24

Coverage is effective on the date both premium and application information is provided to an agent, provided the policy was issued as applied for. Coverage can be denied if the insurer discovers an adverse underwriting factor that was material.

Question 25

Binding Receipts

Answer 25

Also called an unconditional receipt, coverage is guaranteed under a binding receipt until the insurer formally rejects the application.

Question 26

Temporary Insurance Agreement

Answer 26

Similar to the binding receipt, this type extends coverage immediately. Coverage remains in effect during the entire underwriting period. The claim will be paid if the insured dies during the underwriting period. The insurer has the right to cancel coverage if underwriting ultimately denies the application. However, claims incurred during the underwriting period will be paid in line with the terms of the receipt, regardless of if the application is approved.

Question 27

Medical Information Bureau

Answer 27

Another source of underwriting information that focuses explicitly on an applicant’s medical history is the Medical Information Bureau (MIB). The MIB is a clearinghouse of health information supplied by insurers from information on applications. The MIB contains information about an applicant’s previous health history and helps to detect any adverse health conditions that the potential insured processes.

Question 28

Inspection Reports

Answer 28

Insurance companies often request inspection reports for applicants seeking substantial life and health insurance coverage. These reports, obtained from national investigative agencies, provide details about the applicant’s insurability. Information may be gathered through a phone call with the potential policyholder. If an inspection report is requested, the insurance company must inform the applicant.

Question 29

Fair Credit Reporting Act of 1970

Answer 29

In 1970, Congress enacted the Fair Credit Reporting Act to protect the rights of consumers who requested an inspection or credit report. As previously mentioned, this federal law applies to financial institutions that request these types of consumer reports.

Question 30

USA Patriot Act

Answer 30

The USA Patriot Act was enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs. The purpose of the USA Patriot Act is to detect and deter terrorism.

Question 31

What is constructive delivery

Answer 31

By law, the approved policy must be delivered to the insured, but that doesn’t mean it has to be in the physical hands of the insured to be considered “delivered.” If the policy is given to the agent for delivery to the insured, then it is considered constructive delivery.

Question 32

From what authority derives their equipment that an insurance application contains disclosure stating that an investigative consumer report may be obtained on an applicant?

Answer 32

Fair Credit Reporting Act requires that an insurance application state that an investigative consumer report may be obtained on an applicant.

Question 33

On deliver of a plicy, a singned statement of good heath is typically requested if:

Answer 33

If the application was submitted without a intial premium.

Question 34

Upon delivery of a rated life insurance policy, the producer must obtain each of the following, except?

Answer 34

Signed HIPPA disclosure. It should be taken with the application at the time of sales.

Question 35

What is a rated life insurance policy?

Answer 35

A rated life insurance policy, also known as a substandard policy, is a policy that has a higher premium than a standard policy. This is because the person applying for the policy is considered to be a substandard risk, meaning they have a higher chance of dying than the average person.