Life Insurance Underwriting and Policy Issue Flashcards
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.
Warranties
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.
Underwriting
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.).
Substandard Risk (Impaired Risk)
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.
Underwriter
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.
Special Class
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.
Standard Risk
This describes the underwriting category into which risk is placed depending on the applicant’s susceptibility to injury, illness, or death.
Risk Classification
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.
Representations
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.
Replacement
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.
Rated Policy (Rating Up)
This is the person who’s requesting that her life be insured. This is also typically the applicant (but not always).
Proposed Insured
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.
Policy Summary
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.
Preferred Risk
This is a service organization that collects medical data on life and health insurance applicants for member insurance companies.
Medical Information Bureau
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.
Insurable Interest
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.
Inspection Report
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.
Free-Look Period
This is the agent or producer who completes the applicant’s application for insurance.
Field Underwriter
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.
Fair Credit Reporting Act
This describes a statement or proof of a person’s health history and current health status which qualifies that person for coverage.
Evidence of Insurability
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.
Disclosure Form
This describes an individual whose application for coverage was rejected by an insurance company.
Declined Risk
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).
Credit Report
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.
Consumer Report (Investigative Consumer Report)
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.
Conditional Receipt
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.
Buyer’s Guide
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.
Binding Receipt (Unconditional Receipt)
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.
Backdating
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.
Attending Physician Statement (APS)
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.
Application
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.
Applicant
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.
Age Change
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.
Adverse Selection
