CH 7. Life insurance Underwriting and policy issue

Risk classification

Once all the information about a given applicant has been reviewed, the underwriter seeks to classify the risk that the applicant poses to the insurer .This evaluation is known as risk classification. In a few cases, an applicant represents a risk so great that the applicant is considered uninsurable, and the application will be rejected.

Policy summary

A summary of the terms of a life insurance policy, including the conditions, coverage limitations, and premiums. Depending on the laws in the particular location, the policy summary may be required to be issued to potential policyholders with every transaction.

Binding Receipts

Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. if the insured is deemed to be covered by the insurer, the coverage begins on the date the insured receives the conditional binding receipt. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application. Since the underwriting process can often take several weeks or longer, this can place the company at considerable risk. Accordingly, binding receipts are often reserved only for a company's most experienced agents. Like the conditional receipt, a binding receipt typically stipulates a maximum amount that would be payable during the special protection period.

Application

The application for insurance is the basic source of insurability information. Regardless of what other sources of information the underwriter may draw from, the application is the first source of information to be reviewed and will be evaluated thoroughly. Thus, it is the agent's responsibility to see that an applicant's answers to questions on the application are fully and accurately recorded. There are three basic parts to a typical life insurance application: Part I-General, Part II-Medical, and Part III-Agent's Report.

The initial premium for a life insurance policy is typically paid in what way?

It is typically obtained by the producer and forwarded to the insurer

When a producer submits an application that discloses personal information regarding the applicant, who supplies the privacy notice?

The producer The producer is responsible for providing the insurance applicant with privacy notices.

A policyowner pays the first annual premium for a $50,000 life insurance policy and dies one month after the policy effective date. Which of these statements is normally true?

Beneficiary receives $50,000 income tax-free

constructive delivery

From a legal standpoint, policy delivery may be accomplished without physically delivering the policy into the policyowner's possession. By law, the approved policy must be delivered to the insured, but that doesn't mean it has to be in the physical hands of the insured to be considered "delivered." If the policy is given to the agent for delivery to the insured, then it is considered constructive delivery. Constructive delivery 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. However, if the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery. Mere possession of a policy by the client does not actually establish delivery if all conditions have not been met. For example, a policy may be left with an applicant for inspection and an inspection receipt obtained to indicate that the policy is neither in force during the inspection period nor will it be in force until the initial premium has been paid.

When an applicant applies for a large amount of life insurance coverage, which of the following would likely NOT be an underwriting requirement?

Eye examination Underwriting requirements for life insurance normally do not include an eye exam.

An insured may be required to sign which document at policy delivery to ensure there has not been any adverse medical conditions since the time of the application?

Good health statement At policy delivery, a good health statement may need to be signed by the insured to ensure there has NOT been any adverse medical conditions since the time of application.

When must a producer provide disclosure about information practices to an applicant?

Prior to or at the time of signing the application A producer must give a disclosure notice about information practices to an applicant prior to or at the time of signing the application.

Fair credit reporting act

To protect the rights of consumers for whom an inspection or credit report has been requested, Congress in 1970 enacted the Fair Credit Reporting Act. As previously mentioned, this federal law applies to financial institutions that request these types of consumer reports. Insurance companies fall under this category.

Credit reports

Some applicants may prove to be poor credit risks, based on information obtained before a policy is issued. Thus, credit reports obtained from retail merchants' associations or other sources are a valuable underwriting tool in many cases. Applicants who have questionable credit ratings can cause an insurance company to lose money. Applicants with poor credit standings are likely to allow their policies to lapse within a short time, perhaps even before a second premium is paid. An insurance company can lose money on a policy that is quickly lapsed, because the insurer's expenses to acquire the policy cannot be recovered in a short period of time. It is possible that home office underwriters will refuse to insure persons who have failed to pay their bills or who appear to be applying for more life insurance than they reasonably can afford.

Conditional Receipt

The most common type of premium receipt is the conditional receipt. A conditional receipt indicates that certain conditions must be met in order for the insurance coverage to go into effect. The conditional receipt provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam. For example, suppose the applicant dies between the dates of application or of the medical exam and the date the insurer actually approves the application. In this case, the coverage is retroactively effective, as long as the applicant proves to be insurable on the specified date. However, with the conditional insurability receipt, if the applicant proves to be uninsurable as of the date of application or of the medical exam, no coverage takes effect and the premium is refunded.

USA Patriot Act

enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs purpose of this act is to detect and deter terrorism life insurance policy that can be cash-surrendered is an attractive money laundering vehicle because it allows criminals or terrorists to put dirty money in and take clean money out in for form of an insurance company check

Backdating

As we have learned, the premiums required to support a life insurance policy are determined, in part, by the insured's age. If an applicant can be treated by the insurance company as being a year younger, the result can be a lifetime of slightly lower premiums. Insurance companies will allow you to "save age" if your birthday (or 1/2 birthday) are within 2 months of the date the policy is approved. If you choose to save age, that means the company will date the policy the day before your age change. As a result, your premiums will be due as of that age. The purpose of backdating a life insurance policy is to use premiums based on an earlier age. Thus, it is understandable that applicants might want to backdate a policy, making it effective at an earlier date than the present. Many insurers are willing to let an applicant backdate (or "save age") a policy. However, there are some important conditions that must be met before this step can be taken. First of all, the insurer must allow backdating. Second, the company will usually impose a time limit on how far back a policy can be backdated (typically six months). More important, the policyowner is required to pay all back-due premiums and the next premium is due at the backdated anniversary date. After the underwriting is complete and the company has decided to issue the policy, other offices in the company assume the responsibility for issuing the policy. Once issued, the insurance contract is sent to the sales agent for delivery to the applicant. The policy usually is not sent directly to the policyowner since, as an important legal document, it should be explained by the sales agent to the policyowner.

An insurance policy may be issued with a preferred insurance premium in all of these situations EXCEPT

living in a rural area Where an applicant lives is not a factor in determining preferred rates.

After an insurance application has been originated, the producer normally

is the major personal contact to the insured The producer originating an insurance application usually is the major personal contact with the insured.

Insurable interest

iextremely important in life insurance. Without this requirement, people could purchase life insurance and the policy would be nothing more than a wagering contract (insurance policy which is made when the insured has no insurable interest. It is a contract purporting to be one of insurance but which does not qualify as such for want of a sufficient insurable interest. ... A wager policy is also called gambling policy.) As we have established, an insurable interest exists when the death of the insured would have a clear financial impact on the policy owner. Individuals are generally presumed to have an unlimited insurable interest in themselves.Therefore, when the applicant and proposed insured is the same person, there is no question that insurable interest exists. Questions are raised, however, with third-party contracts (those in which the applicant is not the insured). Some relationships are automatically presumed to qualify as insurable interest-spouses, parents, children, and certain business relationships insurable interest can NOT be established sufficiently by sentimental attachment alone. ► An individual has an insurable interest in his or her life ► A husband or wife has an insurable interest in a spouse ► Parents have an insurable interest in their children ► A child has an insurable interest in a parent or grandparent ► A business has an insurable interest in the lives of its officers, directors, and key employees ►Business partners have an insurable interest in each other ► A creditor has an insurable interest in the life of a debtor (but only to the extent of the debt) It bears repeating that with life insurance, an insurable interest must exist only at the policy inception. It does NOT necessarily have to exist when the policy proceeds are actually paid. Thus, a policy owner could assign a life policy to someone who has no insurable interest in the insured, and the assignment would nonetheless be valid.

Buyers (shoppes) guide

Publication that some firms (such as insurance companies) are required to give to the prospective buyers in certain jurisdictions to appraise them of all the terms and conditions involved in the purchase. A consumer publication that describes the type of coverage offered, and provides general information to help an applicant for life or health insurance compare different policies to reach a decision about whether the proposed coverage is appropriate. Also called a shoppers guide.

Field underwriting by a producer

may result in the disclosure of hazardous activities of the applicant. Field underwriting is done when the producer is in front of the applicant. Very important due to the risk of a moral hazard. It is the initial step of the total process of insuring a health risk.

Medicinal information

Part II 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.

Completing the application

The application is one of the most important sources of underwriting information and it is the agent's responsibility to see that it is completed fully and accurately. An insurance company will return the application to the agent if the agent submits an incomplete application. Statements made in the application are used by insurers to evaluate risks and decide whether or not to insure the life of the applicant. An applicant's statements are considered representations. Representations 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. Warranties 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. If an insurer rejects a claim based on a representation, it bears the burden of proving materiality. Representations are considered fraudulent only when they relate to a matter material to the risk and when they were made with fraudulent intent. Each application requires the signatures of the proposed adult insured, the policyowner (if different from the insured), and the agent who solicits the application. The applicant's signature is required on a life insurance application to represent that the statements on the application are true to the best of the applicant's knowledge.

K is an agent who takes an application for individual life insurance and accepts a check from the client. He submits the application and check to the insurance company, however the check was never signed by the applicant. If the application is approved, when will coverage be effective?

The date the agent delivered the policy, collected the initial premium, and obtained a good health statement from the insured

Substandard risk

substandard risk is one below the insurer's standard or average risk guidelines. An individual can be rated as substandard for any number of reasons: poor health, a dangerous occupation, or attributes and habits that could be hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an increase in their policy premium. As noted earlier, an agent plays an important role in underwriting.

General Information

Part I of the application 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. Whether the proposed insured smokes is also indicated in Part I.

Agents report

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. 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.

Preferred risk

insurers reward good risks by assigning them to a preferred risk classification. Companies issue preferred risk policies with reduced premiums with the expectation of better than normal mortality or morbidity experience. Characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking.

Medical information bureau

Another source of underwriting information that specifically focuses on an applicant's medical history is the Medical Information Bureau (MIB). The MIB report will also identify life insurance in force with other carriers as well as lifestyle habits such as drug use. The bureau is formed by more than 700 member insurance companies. Its purpose is to serve as a reliable source of medical information concerning applicants and help disclose cases where an applicant either forgets or conceals pertinent underwriting information or submits erroneous or misleading medical information with fraudulent intent. A Medical Information Report (MIB) may disclose lifestyle habits such as drugs, drinking, overeating and smoking.The MIB operations help to hold down the cost of life insurance for all policyowners through the prevention of misrepresentation and fraud. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. This is how the system works. If a company finds that one of its applicants has a physical ailment or impairment listed by the MIB, the company is pledged to report the information to the MIB in the form of a code number. By having this information, home office underwriters will know that a past problem existed should the same applicant later apply for life insurance with another member company. The information is available to member companies only and may be used only for underwriting and claims purposes. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician.