Definitions (Chapter 6)

Question 1

Insurable Interest

Answer 1

requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract. Insurable interest only needs to exist at the time of the application. A person is considered to have unlimited insurable interest in themselves.

Question 2

Application

Answer 2

is a form supplied by the insurance company, usually filled in by the agent and medical examiner (if applicable) on the basis of information received from the applicant. It is signed by the applicant and is part of the insurance policy if it is issued. It gives information to the home office underwriting department, so it may consider whether an insurance policy will be issued and, if so, in what classification and at what premium rate.

Question 3

General (Part 1) of the application

Answer 3

asks general questions about the proposed insured, including name, age, address, birth date, sex, income, marital status, and occupation. Details about the requested insurance coverage are also included in part 1 such as:

• 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 a hazardous hobby, foreign travel, aviation activity, or military service
• tobacco use

Question 4

Medical (Part 2) of the application

Answer 4

focus 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. This medical section must be completed in it’s entirety for every application. Depending on the proposed policy face amount, this section may or may not be all that is required in the way of medical information. The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen. Physical exams, if requested by the insurer, are performed at the expense of the insurer.

Question 5

Agent’s Report (Part 3) of the application

Answer 5

is 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. 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. The agent’s report also 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 6

Medical Information Bureau

Answer 6

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

Question 7

Attending Physician Statement (APS)

Answer 7

is a report ordered by the insurance company and completed by a physician, hospital or medical facility who has treated, or who is currently treating, a person seeking insurance. An APS is one of the most frequently ordered additional sources of medical background information and can be for a specific ailment (diabetes, broken leg, etc.) or for a general family doctor.

Question 8

Inspection Reports

Answer 8

are reports of an investigator providing facts required for a proper underwriting decision on applications for new insurance and reinstatements.

Question 9

Credit Report

Answer 9

is a summary of an insurance applicant’s credit history, made by an independent organization that has investigated the applicant’s credit standing.

Question 10

Fair Credit Reporting Act

Answer 10

is a federal law requiring an individual to be informed if she is being investigated by an inspection company. The law also outlines the sharing and impact of such information and requires individuals to be notified prior to being investigated.

Question 11

Risk Classification

Answer 11

is the grouping of different risks according to their estimated cost or likely impact, likelihood of occurrence, countermeasures required, etc.

Question 12

Preferred

Answer 12

is a risk whose physical condition, occupation, mode of living, and other characteristics indicate a prospect for longevity for unimpaired lives of the same age.

Question 13

Standard

Answer 13

is a person who, according to a company’s underwriting standards, is entitled to insurance protection without extra rating or special restrictions.

Question 14

Substandard

Answer 14

is a person who is considered an under average or impaired insurance risk because of physical condition, family or personal history of disease, occupation, residence in unhealthy climate, or dangerous habits.

Question 15

Buyer’s Guide

Answer 15

is an informational consumer guide book that explains insurance policies an insurance concepts; in many states they are required to be given to applicants when certain types of coverages are being considered. Buyer’s Guides are often used with life insurance, long term care insurance, and annuities.

Question 16

Policy Summary

Answer 16

is a summary of the 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 17

Conditional Receipt

Answer 17

is given to the policy owners when they pay a premium at the time of application. Such receipts bind the insurance company if the risk is approved as applied for, subject to any other conditions stated on the receipt.

Question 18

Binding Receipts

Answer 18

are given by a company upon an applicant’s first premium payment. The policy, if approved, becomes effective from the date of the receipt.

Question 19

Backdating

Answer 19

is the practice of making a policy effective at an earlier date than the present. This is typically done to lower insurance premiums by ignoring a recent birthday. In most states agents are allowed to back-date up to 6-months, provided the insurer allows this practice.

Question 20

USA Patriot Act

Answer 20

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

Question 21

Representations

Answer 21

are 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 only to the extent that they are material to the risk.

Question 22

Warranties

Answer 22

are 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.

Question 23

Constructive Delivery

Answer 23

is accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company’s own agent. Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy.