Life Insurance Underwriting and Policy Issues Flashcards

1
Q

Insurable Interest

A

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 (the inception of the contract). A person is considered to have unlimited insurable interest in themselves.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Application

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

General (Part 1)

A

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 I 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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Medical (Part II)

A

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. This medical section must be completed in its 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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Agent’s Report (Part III)

A

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. In Part III, 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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Medical Information Bureau

A

service organization that collects medical data on lifeand health insurance applicants for member insurance companies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

attending physician statement (APS)

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Inspection Reports

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Credit Report

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Fair Credit Reporting Act

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Risk Classification

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Preferred

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Standard

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Substandard

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Buyer’s Guide

A

an informational consumer guide books that explain insurance policies and 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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

A Policy Summary

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Conditional Receipt

A

given to the policy owners when they pay a premium at 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.

18
Q

Binding Receipts

A

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

19
Q

Backdating

A

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.

20
Q

USA Patriot Act

A

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.

21
Q

Representations

A

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.

22
Q

Warranties

A

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.

23
Q

Constructive delivery

A

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.

24
Q

PURPOSE OF UNDERWRITING

A

Underwriting: is another term for risk selection. It is the process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums. The underwriter will utilize several different types of information in determining the insurability of the individual. This is called risk classification. Material facts can affect an applicant being accepted or rejected.

One of the main responsibilities of an underwriter is to protect the insurer against adverse selection.

25
Q

UNDERWRITING PROCESS

A

The underwriting process involves reviewing and evaluating information about the applicant and establishing individual against the insurer’s standards and guidelines for insurability and premium rates. The larger the policy, the more comprehensive and diligent the underwriting process.

The most common sources of underwriting information include:

  1. The application
  2. The medical report
  3. Attending physician’s statement
  4. The Medical Information Bureau
  5. Special Questionnaires
  6. Inspection Reports
  7. Credit Reports
26
Q

Part I of the Application

A
  • General Information - Age, DOB, Sex, Address, Marital Status, Occupation,
  • Details about the requested insurance coverage:

o Type of policy

o Amount of insurance

o Name and relationship of the beneficiary

o Other insurance the proposed insured owns

  • Other information personal information

o Tobacco use

o Hazardous hobby

o Foreign travel

o Aviation activity

o Military service.

27
Q

Part II of the Application

A

o Part II focuses on the proposed insured’s health and asks a number of questions about the health history.

o This medical section must be completed in its entirety for every application.

o Depending on the proposed policy, 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.
28
Q

Part III of the Application

A

Agent’s Report (Statement) - Agent’s personal observations of the applicant.

  • Includes the applicant’s financial condition, character, background, purpose of sale, and how long agent has known the applicant.
  • Part III of the application is often called the agent’s report. This 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.

Policies below a certain face amount, such as $50,000 or even $100,000, will not require additional medical information, other than provided by the application. However, they require a medical report for further information.

29
Q

Inspection Reports:

A

This report provides information about the applicant’s character, lifestyle, and financial stability. Inspection reports are usually only requested for larger coverages because they add expense to the underwriting process. 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. However, company rules vary as to the sizes of policies that require a report by an outside agency. Companies are allowed to obtain inspection reports under The Fair Credit Reporting Act. The Fair Credit Reporting Act of 1970 (FCRA) regulates the way credit information is collected and used to protect the rights of consumers for whom an inspection or credit report has been requested. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. If an insurance company requests a credit report, the consumer must be notified in writing. This report provides information about the applicant’s character, lifestyle, and financial stability. 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.

30
Q

Medical Information Bureau (MIB):

A

The MIB is a nonprofit trade organization which maintains medical information about individuals. Information from the MIB is used by life and health insurers. This helps insurance companies from adverse selection by applicants, as it detects misrepresentations, helps identify fraudulent information, and controls the cost of insurance. Information released from the Medical Information Bureau about a proposed insured may be released to the proposed insured’s physician. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured’s physician. An insurance company would NOT notify the MIB if an application is declined.

31
Q

Special Questionnaires

A

are used for applicants involved in special circumstances, such as aviation, military service, or hazardous occupations or hobbies. The questionnaire provides details on how much of the applicant’s time is spent in these activities.

32
Q

Fair Credit Reporting Act of 1970 (FCRA)

A

Regulates the way credit information is collected and used to protect the rights of consumers for whom an inspection or credit report has been requested. Information regarding an individual’s credit standing and general reputation is contained in a consumer report. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. If an insurance company requests a credit report, the consumer must be notified in writing.

33
Q

CLASSIFICATIONS OF RISK

A

Preferred - Low Risk - Lower Premiums
Lower risks tend to have lower premiums. Some of the following may result in a policy being issued with a preferred insurance premium:

  • Applicant is nonsmoker and/or nondrinker
  • Good personal/family health history

Standard - Average Risk - No Extra Ratings or Restrictions standard terms and rates

Substandard - High Risk - Rated Up - Higher Premiums chronic conditions, insulin diabetes, heart disease

Declined - Not Insurable - Potential of Loss to Insurance Company is Too High terminal illness, too many chronic conditions

34
Q

Buyer’s Guide:

A

provides general information about the types of life insurance policies available, in language that can be understood by the average person. This is whole life, this is term life this is what variable life means, etc.

35
Q

Policy Summary

A

provides specific information about the policy purchased, such as the premium and benefits. Mom calls you excited because she bought new health insurance. This allows you to quickly see what “health insurance” specifically did she buy: Medicare Supplement, Major Medical, Critical Illness, Long-term Care.

Suitability Form Ensures that the customer is best suited for the policy they are purchasing. Prevents the sale of unnecessary insurance for example a 75 year old customer living off of Social Security would not be suited for a single premium deferred annuity because they would be giving up a large some of cash that they could live on and possibly not live long enough to collect on the annuity.

36
Q

Signatures:

A

The agent and the applicant are required to sign the application. If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application. Having an applicant that is different from the insured (parent and minor child) is considered third party ownership In most states, once a minor reaches the age of 15, he is eligible to contract for an insurance policy.

If an agent fails to deliver a fully completed and accurate application, the insurance company will return the application to the agent.

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 the applicant must initial the correction. If, however, the company discovers the mistake before the applicant, then it usually returns the application to the agent. The agent then corrects the mistake with the applicant and has the applicant initial the change.

An incomplete application will be returned to the producer and a new one will have to be filled out.

37
Q

Conditional Receipt

A

The producer issues a conditional receipt to the applicant when the application and premium are collected. The conditional receipt denotes that coverage will be effective once certain conditions are met. If the insurer accepts the coverage as applied for, the coverage will take effect from the date of the application or medical exam, whichever is later.

38
Q

Binding Receipt:

A

The binding receipt or the temporary insurance agreement provides coverage from the date of the application regardless of whether the applicant is insurable. Coverage usually lasts for 30 to 60 days, or until the insurer accepts or declines the coverage. Binding receipts are rarely used in life insurance, and are primarily used in auto and homeowners’ insurance. Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. This may also be described as Insurer is bound to coverage until the application is formally rejected. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application

39
Q

Backdating:

A

is the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. Applications usually can only be backdated up to 6 months. This process is also known as “saves age”. In addition, policyowners are required to pay all back-due premiums and the next premium is due at the backdated anniversary date.

40
Q

Constructive Delivery

A

policy delivery may be accomplished without physically delivering the policy into the policyowner’s possession. Constructive policy occurs 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. If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery.

41
Q

The Statement of good health:

A

: verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application. Is used when the applicant did not submit the initial premium with the application 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. Also used when reinstating a policy

42
Q

Personal delivery

A

of the policy is a good practice as it allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personal delivery also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy.