Chapter 7

Question 1

Underwriting

Answer 1

another term for risk selection. the process of reviewing the many characteristics that make up the risk profile of an applicant to determine if the applicant is insurable and, if so, at standard or substandard rates.

Question 2

Two basic questions underwriters seek to answer about an applicant

Answer 2

Is the applicant insurable?

If the applicant and insured are two different people, does an insurable interest exist between the two of them?

Question 3

Insurable interest

Answer 3

exists when the death of the insured would have a clear financial impact on the policy owner. Individuals are generally presumed to have an unlimited insurable interest in themselves. Therefore, when the applicant and proposed insured is the same person, there is no question that the insurable interest exists. Questions are raised, however, with third-party contracts (those in which the applicant is not the insured). Some relationships are automatically presumed to qualify as insurable interest (spouses, parents, children, and certain business relationships). Insurable interest cannot be established sufficiently by sentimental attachment alone.

Business partners have insurable interest in each other. A Business has an insurable interest in the lives of its officers, directors, and key employees. A creditor has an insurable interest in the life of a debtor (but only to the extent of the debt)

An insurable interest must exist only at the policy inception. It does not necessarily have to exist when the policy proceeds are actually paid.

With the exception of buying insurance on a minor, a person may not purchase life insurance on another without their consent.

Question 4

Underwriting process

Answer 4

accomplished by reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer’s standards and guidelines for insurability and premium rates.

The number of sources checked usually depends on several factors, most notably the size of the requested policy and the risk profile developed after an initial review of the application. The larger the policy, the more comprehensive and diligent the underwriting research. If the application raises questions in the underwriter’s mind about the applicant, that can trigger a new review of other sources of information.

Most common sources of underwriting information includes: the application, the medical report, an attending physicians statement, the Medical Information Bureau, special questionnaires, inspection reports, and credit reports.

Question 5

The application

Answer 5

the basic source of insurability information. the first source of information to be reviewed and evaluated thoroughly. It is the agent’s responsibility to see that an applicant’s answer to questions on the application are fully and accurately recorded.

Question 6

3 parts of the application

Answer 6

Part 1: General. Asks general questions about the proposed insured, including name, age, address, birth date, sex, income, marital status, and occupation, type of policy, amount of insurance, name and relationship of the beneficiary, other insurance the proposed insured owns, additional insurance applications the insured has pending.

Other information sought may indicate possible exposure to hazardous hobby, foreign travel, aviation activity, or military service. whether the proposed insured smokes is also indicated in Part 1.

Part 2: Medical. Focuses on the proposed insured’s health and asks a number of questions about the health history, not only of the proposed insured, but of the proposed insured’s family, too. Must be completed in entirety. May not be all that is requested in the way of medical information, depending on the proposed policy face amount. May be required to take a medical exam and/or take a blood test or urine specimen. Physical exams, if requested by the insurer, are performed at thee expense of the insurer.

Part 3: Agent’s report. Where the agent reports personal observations about the proposed insured. Because the agent represents the interests of the insurance company, the agent is expected to complete this part of the application fully and truthfully.

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. Also the agent usually asks if the proposed insurance will replace an existing policy. If the answer is yes, most states demand that certain procedures be followed to protect the rights of consumers when policy replacement is involved.

Question 7

The medical report

Answer 7

quite often a policy is issued on the basis of the information provided in the application alone. most companies have set nonmedical limits, meaning that applications for policy below a certain face amount (maybe $50k or below $100k) will not require any additional medical information other than what is provided by the application. However, for larger policies, a medical report may be required to provide further underwriting information.

Question 8

Attending Physician’s Statement (APS)

Answer 8

if the application’s medical section raises questions specific to a particular medical condition, the underwriter may also request an APS from the physician who has treated the applicant. An insurer’s request for an APS report must be accompanied by a copy of the signed authorization. The statement will provide details about the medical condition in question. Medical reports must be completed by a qualified person, but that person does not necessarily have to be a physician. When completed, the medical report is forwarded to the insurance company, where it is reviewed by the company’s medical director or a designated associate.

Question 9

Medical Information Bureau (MIB)

Answer 9

another source of underwriting information that focuses on an applicant’s medical history. the MIB report will identify life insurance in force with other carriers as well as lifestyle habits such as drug use.

its purpose is to serve as a reliable source of medical information concerning applicants and help disclose cases where an applicant either forgets or conceals pertinent underwriting information or submits erroneous or misleading medical information with fraudulent intent.

A MIB may disclose medical habits such as drugs, drinking, overeating and smoking. The MIB operations help to hold down the cost of life insurance for all policy owner through the prevention of misrepresentation and fraud. Information received from the MIB about a proposed insured may be released to the proposed insured’s physician.

if a company finds that one of its applicants has a physical ailment or impairment listed by the MIB, the company is pledged to report the information to the MIB in the form of a code number. By having this information, home office underwriters will know that a past problem existed should the same applicant later apply for life insurance with another company. The information is available to member companies only and may be used for underwriting and claims purposes.

Question 10

USA Patriot Act

Answer 10

enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs. the purpose of the USAPA is to detect and deter terrorism. A life insurance policy that can be cash-surrendered is an attractive money laundering vehicle because it allows criminals or terrorists to put dirty money in and take clean money out in the form of an insurance company check .

Question 11

Special Questionnaires

Answer 11

When necessary, these may be required for underwriting purposes to provide more detailed information related to aviation or avocation, foreign residence, finances, military service, or occupation.

Question 12

Inspection reports

Answer 12

obtained by insurance companies on applicants who apply for large amounts of life and health insurance. these reports contain information about prospective insureds, which is reviewed to determine their insurability. Insurance companies normally obtain inspection reports from national investigative agencies or firms and may contain information obtained by a telephone call to the proposed insured.

purpose of these is to provide a picture of an applicant’s general character and reputation, mode of living, finances, and any exposure to abnormal hazards. investigators or inspectors may interview employees, neighbors, and associates of the applicant, as well as the applicant. it may also include a credit report. when an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report.

an insurer’s obligation involving the disclosure of an insured’s nonpublic information is to give notice, explain, and allow opting out.

usually not requested on applicants who apply for smaller policies, although company rules vary as to the sizes of policies that require a report by an outside agency.

If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that it is permitted to do so under the Fair Credit Reporting Act.

Question 13

Fair Credit Reporting Act of 1970

Answer 13

established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. The law is intended to ensure fairness with regard to confidentiality, accuracy, and disclosure. The FCRA is quite extensive.

a life insurance applicant must be informed of their rights that fall under the Fair Credit Reporting Act upon completion of the application.

Question 14

Credit reports

Answer 14

applicants who have question credit ratings can cause an insurance company to lose money. applicants with poor credit standings are likely to allow their policies to lapse within a short time, perhaps even before a second premium is paid. An insurance company can lose money on a policy that is quickly lapsed, because the insurer’s expenses to acquire the policy cannot be recovered in a short period of time. It is possible that home office underwriters will refuse to insure persons who have failed to pay their bills or who appear to be applying for more life insurance than they reasonably can afford.

Question 15

Applicant ratings

Answer 15

once all the information about a given applicant has been reviewed the underwriter seeks to classify the risk that the applicant poses to the insurer. this evaluation is known as risk classification.

Question 16

Risk classifications

Answer 16

Preferred risk: Many insurers reward good risks by assigning them to a preferred risk classification. Companies issue preferred risk policies with reduced premiums with the expectation of better than normal mortality or morbidity experience. Characteristics that contribtue to a preferred risk rating include not smoking, weight within an ideal range, and not drinking.

Standard risk: individuals who fit the insurer’s guidelines for policy issue without special restrictions or additional rating. These individuals meet the same conditions as the tabular risks on which the insurer’s premium rates are based.

Substandard risk: one below the insurer’s standard or average risk guidelines. An individual can be rated as substandard for any number of reasons: poor health, a dangerous occupation, or attributes and habits that could be hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an increase in the policy premium. As noted earlier, an agent plays and important role in underwriting.

Question 17

proper solicitation

Answer 17

as a representative of the insurer, an agent has the duty and responsibility to solicit good business. This means that an agent’s solicitation and prospecting efforts should focus on cases that fall within the insurer’s underwriting guidelines and represent profitable business to the insurer. At the same time, the agent has a responsibility to the insurance buying public to observe the highest professional standards when conducting insurance business.

Question 18

Life insurance buyers guide

Answer 18

These documents usually delivered before the agent accepts the applicant’s initial premium.

The buyers guide is a generic publication that explains life insurance in a way that average consumers can understand. it speaks of the concept in general teams and does not address the specific product or policy being considered.

Question 19

policy summary

Answer 19

These documents usually delivered before the agent accepts the applicant’s initial premium.

The policy summary addresses the specific product being presented for sale. It identifies the agent, the insurer, the policy, and each rider. It includes information about premiums, dividends, benefit amounts, cash surrender values, policy loan interest rates, and life insurance cost indexes of the specific policy being considered.

Question 20

Unfair discrimination

Answer 20

no insurer is permitted to engage in any unfair discrimination regarding applicants for health insurance. Sexual orientation, religious preference or geographical location are prohibited life insurance underwriting factors because they are unfairly discriminatory.

Question 21

Completing the application

Answer 21

an insurance company will return the application to the agent if the agent submits an incomplete application.

an applicants statements are considered representations.

Each application requires the signatures of the proposed adult insured, the policy owner (if different from the insured), and the agent who solicits the application. The applicant’s signature is required on a life insurance application to represent that the statements on the application are true to the best of the applicant’s knowledge.

applicants who pay a premium deposit with the application are entitled to a premium receipt. it is the type of receipt given that determines exactly when and under what conditions and applicant’s coverage begins. The two major types of receipts are conditional receipts and binding receipts.

Question 22

Representations

Answer 22

statements an applicant makes as being substantially true to the best of the applicant’s knowledge and belief, but which are not warranted to be exact in every detail. Representations must be true to the extent hat they are material to the risk.

Question 23

Warranties

Answer 23

statements that are guaranteed to be correct. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void. If an insurer rejects a claim based on representation, it bears the burden of proving materiality. Representations are considered fraudulent only when they relate to a matter material to the risk and when they were made with fraudulent intent.

Question 24

Changes in the application

Answer 24

when an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but eh applicant must initial the correction. if the company discovers a mistake, it usually returns the application to the agent. the agent then corrects the mistake with the applicant and has the applicant initial the change.

When attached to the insurance policy, the application becomes part of the legal contract between the insurer and the insured. Consequently, the general rule is that no alterations of any written application can be made by any person other than the applicant without the applicant’s permission.

Question 25

Initial premiums and receipts

Answer 25

its in the best interests of both the proposed insured and the agent to have the initial premium paid with the application and forwarded to the insurer. For the agent, this will usually help solidify the sale and may accelerate the payment of commissions on the sale. The proposed insured benefits by having the insurance protection become effective immediately, with some important restrictions.

if a premium is not paid with the application, the agent should submit the application to the insurance company without the premium. The policy will not become valid until the initial premium is collected.

The consideration is the first premium payment plus the application. An insurer will not allow an applicant to possess a policy without receipt of the initial premium.

Question 26

Conditional receipts

Answer 26

most common type of premium receipt. indicates that certain conditions must be met in order for the insurance coverage to go into effect. the conditional receipt provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam.

Question 27

Binding receipts

Answer 27

under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application. Since the underwriting process can often take sever weeks or longer, this can place the company at considerable risk. Accordingly, binding receipts are often reserved only for a company’s most experienced agents. Like the conditional receipt, a binding receipt typically stipulates a maximum amount that would be payable during the special protection period.

Question 28

Temporary insurance agreement

Answer 28

similar to the binding receipt, this type extends coverage immediately. Coverage remains in effect during the entire underwriting period. if the insured dies during the underwriting period, the claim will be paid, the insurer has the right to cancel coverage if the application is ultimately denied by underwriting.

Question 29

policy effective date

Answer 29

important for 2 reasons

• identifies when coverage is effective
• establishes the date by which future annual premiums must be paid

if a receipt (either conditional or binding) was issued in exchange for the payment of an initial premium deposit, the date of the receipt will generally be noted as the policy effective date in contract.

if a premium deposit is not given with the application, the policy effective date is usually left to the discretion of the insurer. often it will be the date the policy is issued by the insurance company.

Question 30

backdating

Answer 30

premiums to support a life insurance are determined in part by the insured’s age. if an applicant can be treated by the insurance company as being a year younger, the result can be a lifetime of slightly lower premiums. the purpose of backdating a life insurance policy is to use premiums based on an earlier age. thus, it is understandable that applicants might want to backdate a policy, making it effective at an earlier date than the present.

many insurers are willing to let an applicant back date (or save age) a policy. however, there are some important conditions that must be met before this step can be taken.

First, the insurer must allow backdating. Second, the company will usually impose a time limit on how far back a policy can be backdated (typically 6 months). Most important, the policy owner is required to pay all back-due premiums and the next premium is due at the backdated anniversary date.

after the underwriting is complete and the company has decided to issue the policy, other offices in the company assume the responsibility for issuing the policy. once issued, the insurance contract is sent to the sales agent for delivery to the applicant. The policy usually is not sent directly to the policy owner since, as a legal document, it should be explained by the sales agent to the policy owner.

Question 31

Constructive delivery

Answer 31

from a legal standpoint, policy delivery may be accomplished without physically delivering the policy into the policy owners possession. Constructive delivery is accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policy owner, including the company’s own agent. Mailing the policy to the agent for unconditional delivery to the policy owner also constitutes constructive delivery, even if the agent never personally delivers the policy.

Question 32

explaining the policy and ratings to clients

Answer 32

only by personally delivering a policy does the agent have a timely opportunity to review the contract and its provisions, exclusions, and riders.

explaining the policy and how it meets the policy owner’s specific objectives helps avert misunderstandings, policy returns, and potential lapses.

Question 33

obtaining statement of insured’s good health

Answer 33

in some instances, the initial premium will not be paid until the agent delivers the policy. in such cases, common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured’s continued good health.

the agent is then to submit the premium with the signed statement to the insurance company. because there can be no contract until the premium is paid, the company has a right to know that the policy owner has remained in reasonably good health from the time the policy owner signed the application until receiving the policy.