Unit 2: Life/Health Insurance Underwriting

Question 1

What is an underwriting?

Answer 1

The process of evaluating a risk to determine if it is acceptable based on established insurance company guidelines

Question 2

Who is frequently referred to as the field underwriter?

Answer 2

Agent/producer

Question 3

What can be done if a produce finds they have mistakenly recorded applicant information on an application?

Answer 3

•the applicant must certify that an error occurred & place their initials next to the correction
•some insurers also require the producer to initial any change

Question 4

What happens if a policy is issued & the application was incomplete?

Answer 4

•the underwriter on behalf of the company waived its right to that information
•if a claim arises, the company cannot deny it based on the fact that information was missing from the application

Question 5

What is backdating?

Answer 5

•some insurers allow an application to be backdated so the premium can be based on an applicant’s earlier age & lower the cost is the premium
•this would permit a 41-year-old applicant to purchase a life insurance policy using the age of 40
•most state laws allow life insurance applications to be backdated up to 6 months
•if an application is backdated, the policy becomes effective as of the date requested on the application
•to retrieve a less expensive premium, the applicant must pay any additional premiums that would have been paid from the backdate

Question 6

What are the required signatures to complete the application process?

Answer 6

•application form signed by applicant & producer/agent
•proposed insured must sign if the applicant is not the insured
•company officer must sign a corporation owned policy
•a parent or legal guardian signs a juvenile policy for the minor

Question 7

What is the producer’s report?

Answer 7

•Part 3 of a life insurance application
•producer/agents report or producer’s statement
•producer records information that pertains to the proposed insured including the producer’s relationship to the proposed insured & anything the producer knows about the proposed insured’s financial status, habits, & character
•never seen by the client
•NOT attached to the policy & application when it’s issued
•signed only by the producer

Question 8

When does an “offer to buy” insurance exist?

Answer 8

•when the first premium is submitted with the life insurance application
•if no premium is submitted with the application, coverage is delayed until the premium is paid
•if the insured becomes uninsurable or dies between the time when the application is submitted & the first premium is collected, the policy will pay no benefit

Question 9

When the first premium is collected at the time of application, what must the producer provide?

Answer 9

•a receipt
•the effective date of coverage will depend on the type of receipt issued

Question 10

When are most conditional receipts effective?

Answer 10

The date of the application or the date of a required medical exam, whichever’s later

Question 11

What happens with conditional receipts if the proposed insured dies before a policy is issued?

Answer 11

1 of 2 options:

1. If the deceased insured meets the company’s standard underwriting requirements and a policy would have been issued had they lived, the policy is in force and the death benefit will be paid to the beneficiary
2. If the insured is found to be uninsurable or a substandard risk, no coverage would be in force
   -the premium that was collected with the application will be returned to the policyowner or beneficiary (in the case of death)

Question 12

Conditional receipt

Answer 12

•premium paid with application
•insurance effective the date of the application completed & signed or the medical exam if required, whichever is later
•must be standard or preferred risk
-can be determined after death

Question 13

What are binding receipts?

Answer 13

•effective for 30-60 days from the date of application even if the applicant is found to be uninsurable
•most often used with auto or homeowners insurance
•rarely used with life insurance
•insurer can either issue a policy or cancel the binder before the end of the stated period

Question 14

What are life insurance binders (binding receipts) called?

Answer 14

Temporary insurance agreements

Question 15

What are the 3 parts to an application used to purchase life insurance?

Answer 15

•Part 1-general information
•Part 2-health information
•Part 3-producer’s report

Question 16

What is included in Part 1 of an application to purchase life insurance?

Answer 16

General information:

•name
•address
•DOB
•gender
•SSN
•drivers license number
•marital status
•income
•occupation & business address
•type of policy & face amount being applied for
•beneficiary
•other insurance owned

**if the applicant is someone other than the insured, the applicant’s name & address will also be requested

Question 17

What is included in Part 2 of an application to purchase life insurance?

Answer 17

Health information:

•height & weight
•tobacco usage
•drug usage
•international travel
•current medical treatments (details of most recent office visit)
•medications being taken
•conditions the insured has sought treatment for or been diagnosed with in the past
•history of disability claims
•health conditions prevalent in the insured’s family
•high-risk hobbies (aviation, skydiving, scuba diving, auto/boat/motorcycle racing, mountain climbing)
•name & address of current physician

Question 18

Attending Physician’s Statement (APS)

Answer 18

•sometimes asked for by an underwriter to find out about the applicant’s current condition & medical history with the physician
•underwriter may also ask for copies of medical records

Question 19

If any health information will be shared, applicants must be given full notice of:

Answer 19

•the insurer’s information-sharing practices
•their right to maintain privacy
•an opportunity to refuse to have their information released

Question 20

What is the Medical Information Bureau (MIB)?

Answer 20

•non-profit insurance trade association that maintains underwriting information on applicants
•when member companies discover unfavorable information about an applicant during their underwriting process, they report it to the MIB using codes signifying certain conditions
•if the applicant applies for insurance elsewhere, other members companies will have access to this information
•types of information maintained in MIB files include medical history, hazardous jobs or hobbies, & poor driving records
•the purpose is to reduce instances of misrepresentation & fraud

Question 21

What are 4 notable points about the Medical Information Bureau (MIB)?

Answer 21

•insurers may not a make an adverse underwriting decision (such as rejecting the applicant) solely on the basis of information from the MIB
—>insurers may only use this information to further their investigation
•insurers do NOT report underwriting decisions to the MIB
—>this prevents other member insurers to accept or reject an applicant based on what other insurance companies have done
•an applicant must be given written notice that information may be reported to & obtained from the MIB & insurers must get an applicant’s written authorization to do so
•applicants must also be notified that applying for insurance or filing a claim with another company may trigger the release of MIB information

Question 22

What are consumer reports?

Answer 22

•used to determine a consumer’s eligibility for personal credit (credit report) or insurance or for employment
•may be issued only to persons who have a legitimate business need for the information
•underwriters use an applicant’s credit report to determine if they are reliable when paying their monthly bills
•issuers count on policyholders to pay their premium to defer the high initial costs to issue a life insurance policy

Question 23

What are investigative consumer reports?

Answer 23

•contain information obtained by interviewing individuals who know something about the consumer such as associates, friends, & neighbors
•consumers must be notified & give their consent to having such reports done
•also called “inspection reports”

Question 24

What are the 4 classifications of risk?

Answer 24

1. Standard
2. Preferred
3. Substandard
4. Declined

Question 25

What is standard risk?

Answer 25

•average health & normal life expectancy
•fall into the normal range anticipation aged by the company when it established its premiums
•can be insured for standard rates

Question 26

What is preferred risk?

Answer 26

•excellent health
•risk of loss that is below average
—>therefore favorable to the company
•favorable risk factors include such things as healthy lifestyle, clean medical history, or low-risk occupation
•may be insured at preferred or discounted rates

Question 27

What is substandard risk?

Answer 27

•below average life expectancy
•high-risk life insurance
—>unfavorable to the company
•unfavorable risk factors include poor health, dangerous occupation, or risky habits
•can only be accepted by charging higher rates
•sometimes referred to as being “rated up” or “rated”

Question 28

What are some methods of charging a relatively higher rate for substandard risks?

Answer 28

•adding a flat additional charge
•charging applicants the standard premium for a higher attained age
•reducing the benefits provided by the policy

Question 29

What is declined risk?

Answer 29

An insurer’s underwriting guidelines indicate that an applicant is NOT insurable at ANY price

Question 30

What is a statement of good health?

Answer 30

•required if no premium was paid with the application
•if health changed-agent can’t deliver policy

•during the delivery appointment, the agent/producer must collect the first premium if it was not paid at the time of application
•additionally, the policyowner must sign a statement of good health attesting that their health is the same when they applied for the policy

Question 31

When the premium is collected at the time of application for a policy, when is the effective date of coverage?

Answer 31

The date of application or the date of the medical exam if required

Question 32

If an applicant accepts a substandard policy & pays the additional premium, when is the effective date of coverage?

Answer 32

The date the policy was delivered

Question 33

If an application for insurance is sent to the insurer without the first premium, but it is paid at policy delivery, when is the effective date of coverage?

Answer 33

The date the policy was delivered

Question 34

Fair Credit Reporting Act (FCRA)

Answer 34

•3rd party information
•notice to applicant is required
•consumers have rights & can dispute information in files
•penalty-fines (max or $5,000) and/or imprisonment (1 year)

•required consumer reporting agencies to adopt reasonable procedures for exchanging information on credit, personnel, insurance, & other subjects in a manner that is fair & equitable to the consumer with respect to the confidentiality, accuracy, relevancy, & proper use of this information

Question 35

What is STOLI/IOLI?

Answer 35

•Stranger-Owned Life Insurance or Investor-Owned Life Insurance
•transactions that are life insurance arrangements involving investors who persuade seniors to take out a new life insurance policy with the investors named as the beneficiary
•banned in most states

Question 36

What is ERISA?

Answer 36

•protects participants in employee benefit plans
•qualified pension plans & group insurance
•reporting & disclosure information for plan participants

•Employee Retirement Income Security Act
•enacted to protect the interests of participants in employee benefit plans as well as the interests of the participants’ beneficiaries
•much of it deals with qualified pension plans, but some sections also apply to group insurance plans

Question 37

If a life insurance applicant is given a binding receipt, when does coverage become effective?

Answer 37

On the date the receipt is given