Chapter 6 - Life Insurance Underwriting and Policy Issue

Representation

Statements made by applicants that are substantially true to the best of their knowledge, but not warrantied as exact in every detail.

Part III of the Application

* 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 Ill 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.

Application Errors

* If an agent realizes that an applicant has made an error on an application, the agent must correct the information and have the applicant initial the changes * An incomplete application will be returned to the agent * The agent can NEVER change the application without the customer present to initial the changes

Policy Issue

-Happens when the insurer "approves" the application, they are "issuing the policy" -Technically a policy could be ISSUED and not delivered for days or weeks later

Privacy Notice

According to HIPAA, a privacy rule that provides federal protection for an individual's health information and gives patients an array of rights with respect to that individually identifiable health information, when an agent submits an application that reveals personal information regarding the applicant, the agent is responsible for providing the insurance applicant with privacy notices. Producers must also secure an HIV consent form from the applicant in applicable situations and communicate that blood tests may be a required underwriting practice. In other words, even though the insurer requires a blood test as part of its normal underwriting activity, it must still secure a signed consent form which indicates to the applicant that any blood taken will be screened for the HIV virus and that he or she is providing permission for such testing to be completed.

Premiums and Receipts

Agents should make every effort to collect the initial premium with the application. However, if premium is not collected with the application, the policy will not become valid until the initial premium is collected. The agent issues the applicant a premium receipt upon collecting the initial premium. The only time a customer will receive a receipt is if they pay their initial premium at the time of application. No receipt will be given at any other time. There are two types of premium receipts that determine when coverage will begin. These are conditional receipts and binding receipts. - Conditional Receipt - Binding Receipt

Credit Reports

An applicant's credit history is sometimes used for underwriting and to determine the likelihood of making premium payments. The Fair Credit Reporting Act requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

Special Questionnaires

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.

Effective Date of Coverage

As explained under conditional receipt, coverage is not effective without collection of the initial premium, approval of the application, and policy issuance and delivery. If the initial premium does not accompany the application, the premium must be collected by the agent. In some cases, the insurer requires the agent to collect a statement of good health from the insured at the time of delivery. If the initial premium is not submitted with the application, the policy effective date is established by insurer. In this case, it could be the date of policy issuance, or the date the policy is delivered to the applicant, premium collected, and statement of continued good health signed. The effective date is important for two reasons: it identifies when the coverage is effective and establishes the date by which future annual premiums must be paid.

Standard Risk Classification

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

Part I of the Application

Contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, and occupation * 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

Part II of the Application

Contains questions pertaining to medical background, past and present health, any medical visits, hospitalizations or surgeries in recent years, and medical status of immediate family members * Medical Information - Health History o Part Ill 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.

Suitability Form

Ensures that the customer is best suited for the policy they are purchasing. Prevents the sale of unnecessary insurance. EX: 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.

Substandard Risk Classification

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

Field Underwriting Procedures

Is completed by the agent. Unlike the insurer, the agent has face-to-face contact with the applicant, which can aid the insurer in risk selection. As field underwriters, agents help reduce the chance of adverse selection, assure that the application is filled out completely and correctly, collect the initial premium, and deliver the policy. Other duties include: * Forwarding the application to the insurer in a timely manner * Seeking additional information about the applicant's medical history if requested * Notifying the insurer of any suspected misstatements in the application * Assuring the application is filled out completely and correctly * Collect the initial premium * In addition to that, agents have the responsibility and duty to solicit good business. Therefore, an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer's underwriting quidelines and represent profitable business to the insurer. Upon policy delivery, agents must deliver the life insurance buyer's quide and policy summary to the applicant. A life insurance producer may also be required to obtain a signature on a statement of good health at the time of policy delivery.

Medical Report

Is sometimes used for underwriting policies with higher face amounts. If the information in the medical section warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS).

Application

Is the starting point and basic source of information used by the insurance company in the risk selection. Although applications differ from company to company they all have the following same components. Insurable interest must exist between the policyowner and insured at the time when the application is made. Insurable interest exists when the death of the insured would have a clear financial impact on the policyowner.

Preferred Risk Classification

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

Declined Risk Classification

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

Classifications of Risk

Once all the information about a given applicant has been reviewed, the underwriter will utilize several different types of information in determining the insurability of the individual and the risk that the applicant poses to the insurer. This evaluation is known as risk classification. The following rating classification system is used to categorize the favorability of a given risk: - Preferred, - Standard, - Substandard, - Declined

Constructive Delivery

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.

Fair Credit Reporting Act (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. 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. * The applicant has the right to receive a copy of the report when an investigative consumer report is used in connection with an insurance application.

Medical Information Bureau (MIB)

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.

Signatures

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.

Binding Receipt

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

Underwriting Process

The 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

Conditional Receipt

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.

Inspection Reports

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.

The Statement of Good Health

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

Warranty

Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

USA Patriot Act

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

Purpose of 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.

Backdating

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. Insurance contract is sent to the sales agent for delivery to the applicant. The policy usually is not sent to the policy owner because it should be explained by the sales agent to the policyowner.

Personal Delivery

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.

Applicant Ratings

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 is evaluation is known as "risk classification".

Buyer's Guide

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.

Policy Summary

provides specific information about the policy purchased, such as the premium and benefits. EX: 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.