Life Insurance Underwriting and Policy Issue

Question 1

Most state laws specify that an 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 regardless of whether the warranty is material and whether such breach of warranty had contributed to the loss.

Answer 1

Warranties

Question 2

This involves the analysis of information that’s obtained from various sources pertaining to an applicant for insurance and the determination of whether the insurance should be issued as requested, offered at a higher premium, or declined.

Answer 2

Underwriting

Question 3

This describes an applicant whose physical condition doesn’t meet the usual minimum standards. If the substandard classification is due to adverse health, the application may be declined or written with a “rated-up” premium. An applicant may be in excellent health, but considered substandard due to her activities, hobbies, or avocations (e.g., scuba diving, skydiving, etc.).

Answer 3

Substandard Risk (Impaired Risk)

Question 4

This is a person who identifies, examines, and classifies the degree of risk represented by a proposed insured in order to determine whether coverage should be provided and, if so, at what rate.

Answer 4

Underwriter

Question 5

This describes an applicant who cannot qualify for a standard policy but may secure one with a rider that waives the payment for a loss involving certain existing health impairments. The applicant may be required to pay a higher premium or to accept a type of policy that’s different from the one for which he applied.

Answer 5

Special Class

Question 6

This describes a person who, according to a company’s underwriting standards, is considered an average risk and insurable at standard rates. High-risk or low-risk candidates may qualify for increased or discounted rates based on their deviation from the standard.

Answer 6

Standard Risk

Question 7

This describes the underwriting category into which risk is placed depending on the applicant’s susceptibility to injury, illness, or death.

Answer 7

Risk Classification

Question 8

Most state laws specify that an applicant’s statements on an application are considered representations and not warranties. A representation is only required to 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.

Answer 8

Representations

Question 9

This is a permitted activity in which a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one. If this activity occurs, producers must provide a “Notice Regarding Replacement” to the consumer. The producer must also notify the insurer that a replacement is occurring.

Answer 9

Replacement

Question 10

A rated policy is the basis for an additional charge to the standard premium because the person insured is classified as a higher-than-average risk. The higher risk level is typically the result of impaired health or a hazardous occupation.

Answer 10

Rated Policy (Rating Up)

Question 11

This is the person who’s requesting that her life be insured. This is also typically the applicant (but not always).

Answer 11

Proposed Insured

Question 11

This summarizes the basic 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.

Answer 11

Policy Summary

Question 12

This describes an applicant who represents the likelihood of risk that’s lower than that of the standard applicant. This is typically due to better than average physical condition, occupation, mode of living, and other characteristics as compared to other applicants of the same age.

Answer 12

Preferred Risk

Question 13

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

Answer 13

Medical Information Bureau

Question 14

This describes the financial or emotional relationship between two or more parties which justifies one owning a life insurance policy on the other. A person is considered to have an unlimited insurable interest in her own life.
Insurable interest may exist in another person’s life if there’s a chance of a financial or emotional loss due to that person’s death. The insurable interest must exist at the time of policy issue.

Answer 14

Insurable Interest

Question 15

This is a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service.

Answer 15

Inspection Report

Question 16

All life insurance policies must include at least a 10-day free-look period. This period begins when the producer delivers the insurance policy. During this period, if the policy owner decides to return the contract to the insurer, he will receive a full premium refund. Mail order or direct response insurers must include a free-look period of at least 30 days.

Answer 16

Free-Look Period

Question 17

This is the agent or producer who completes the applicant’s application for insurance.

Answer 17

Field Underwriter

Question 18

Passed in 1970, this is a federal law that provides an insurer with the right to receive additional information regarding applicants for insurance coverage. This law permits an insurer to conduct a consumer report on both applicants and proposed insureds. An applicant for insurance must be informed of the purpose of the report. If coverage is declined due to the information in the report, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report.

Answer 18

Fair Credit Reporting Act

Question 19

This describes a statement or proof of a person’s health history and current health status which qualifies that person for coverage.

Answer 19

Evidence of Insurability

Question 20

As required by various state regulatory agencies, this is a comparison form that must be given to every policy owner who chooses to replace an existing policy with another.

Answer 20

Disclosure Form

Question 21

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

Answer 21

Declined Risk

Question 22

This is a summary of an insurance applicant’s credit history (i.e., credit score, debt levels, repayment history, assumed creditworthiness, etc.) that’s completed by an independent organization which has investigated the applicant’s credit standing. Credit reports are typically obtained from one of the three major credit bureaus (Experian, Equifax, and TransUnion).

Answer 22

Credit Report

Question 23

This report is a detailed background investigation that may include an interview with co-workers, friends, and neighbors about an applicant’s character, reputation, lifestyle, etc. Insurers are allowed to conduct a consumer report to obtain additional information as long there’s no invasion of privacy. A common type of consumer report is a credit report.

Answer 23

Consumer Report (Investigative Consumer Report)

Question 24

This is a form that’s customarily required to be signed by the agent and given to the prospective owner at the time a new application is completed. The issuing of a receipt is subject to rules of the individual company. Most companies require the agent to collect an initial premium and, in turn, grant some level of limited coverage under special conditions before issuing the policy. Without a valid conditional receipt, no coverage is in force until the policy is issued, delivered, and accepted with the initial premium paid.

Answer 24

Conditional Receipt

Question 25

This is a pamphlet which describes and compares various forms of life or health insurance. This guide must be provided to a consumer by the producer when the producer is attempting to solicit insurance. This guide provides the consumer with information so that she can make an informed decision when purchasing insurance coverage.

Answer 25

Buyer’s Guide

Question 26

This is one of the types of receipts that’s given by an insurance company 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.

Answer 26

Binding Receipt (Unconditional Receipt)

Question 27

This is the practice of making the effective date of a policy earlier than the application date. Backdating is used to make the issue age lower than an applicant’s real age in order to obtain a lower premium. State laws typically limit the time to which policies can be backdated to six months. Due to the nature of the investment, backdating is not allowed in variable contracts.

Answer 27

Backdating

Question 28

An APS is used when the application or medical examiner’s report reveals conditions or situations, past or present, about which more information is desired. Due to physician/patient confidentiality guidelines, the applicant must sign an authorization for a physician is allowed to release information to the insurance company underwriter.

Answer 28

Attending Physician Statement (APS)

Question 29

The application is the statement of information that’s given when a person applies for life, health, or disability insurance. The insurance company’s underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company’s guidelines. Applications are attached to, and made a part of, all individual contracts.

Answer 29

Application

Question 30

The applicant is the person who’s completing an application with an insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case.

Answer 30

Applicant

Question 31

This is the date halfway between birthdays when the applicant’s age changes to the next higher age. For some insurers, the age is based on the applicant’s age at his nearest birthday, while for others, it’s based on the applicant’s age as of his last birthday.

Answer 31

Age Change

Question 32

This represents the tendency of a disproportionate number of poor risks to seek or buy insurance or to maintain existing insurance in force (i.e., the selection against the insurance company). Sound underwriting reduces adverse selection.

Answer 32

Adverse Selection