Life Insurance Underwriting and Policy Issue

Medical Information Bureau (MIB)

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

Credit Report

A summary of an insurance applicant's credit history, made by an independent organization that has investigated the applicant's credit standing.

Field Underwriter

The agent or producer completing the applicant's application for insurance

Inspection Report

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.

Risk Classification

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

Applicant

the person completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case.

Post-Selection Activities

(1) evaluating the risk utilizing all appropriate sources of information; or (2) determining the acceptability of the risk and whether the applicant will be classified as a preferred, standard or substandard risk (a substandard risk may be uninsurable or can be written with a higher premium).

Pre-Selection Underwriting Activities

(1) obtaining in complete detail all policy application questions, including personal physician information; (2) providing insight with regard to possible underwriting rating services; and (3) stressing the importance of answering all questions honestly. An agent may not legally guarantee or bind coverage.

Fair Credit Reporting Act

A federal law that established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant and properly used.

Conditional Receipt

A form 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 individual company rules. Most require that the agent 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.

Buyer's Guide

A pamphlet that describes and compares various forms of life or health insurance. This guide must be provided to a consumer by the producer when the latter is attempting to solicit insurance. This guide makes information available to the consumer that helps them make an informed decision when purchasing insurance coverage.

Free-Look Period

All life insurance policies must include at least a ten-day free-look period in a life insurance contract. This period begins when the producer delivers the insurance policy. If the policy owner decides to return the contract to the insurer during this period, they will receive a full premium refund. Mail order or direct response insurers must include a free-look period of at least thirty days.

Trial Application

An application submitted without an initial premium

Binding Receipt

It is one of the types of receipts 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 of time or until the insurer declines the application.

Representations

Most State laws specify that the applicant's statements on the application are considered representations and not warranties. A representation need only 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.

Warranties

Most State laws specify that the 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 whether or not the warranty is material and whether or not such breach of warranty had contributed to the loss.

Application - Part I: General Applicant Information

Part I of the application includes 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 owned by the proposed insured - Additional insurance applications that are pending for the proposed insured

Application - Part II: Medical and Health History

Part II focuses on the proposed insured's health and includes several questions about the person's health history, not only of the proposed insured, but also of the proposed insured's family. This medical section must be completed in its entirety for every application. Depending on the proposed policy face amount, this section may not be all that's required by way of medical information. The individual to be insured may be required to take a medical exam or provide a blood test or urine specimen. If requested by the insurer, physical exams are performed at the expense of the insurer.

Application - Part III: The Agent's Report (or Statement)

Part III of the application is referred to as the agent's report or agent's statement. The agent's statement is where the agent indicates his personal observations of the proposed insured. 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 will also typically indicate whether the proposed insurance will replace an existing policy. If it is a replacement, most states require specific procedures to be followed to protect consumers' rights when policy replacement is involved.

Policy Summary

Summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums.

Rated Policy (Rating Up)

The basis for an additional charge to the standard premium because the person insured is classified as a higher than average risk. The above standard rates usually result from impaired health or hazardous occupations

Proposed Insured

The person whose life is requesting to be insured. Typically, but not always, this is also the applicant.

Disclosure Forms

a comparison form required by various state regulatory agencies to be given to every policy owner when replacing an existing policy with another.

Consumer Report

a detailed background investigation that may include an interview with coworkers, 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 is no invasion of privacy present. A common type of consumer report involves a credit report.

Replacement

a legal activity where a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one. Producers must provide a "Notice Regarding Replacement" to the consumer when this activity may occur. The producer must also notify the insurer that a replacement is occurring as well.

Standard Risk

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.

Evidence of insurability

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

Special Class

describes an applicant who cannot qualify for a standard policy, but may secure one with a rider waiving the payment for a loss involving certain existing health impairments. They may be required to pay a higher premium or to accept a policy of a type other than the one for which he has applied.

Preferred Risk

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

Substandard Risk (Impaired Risk)

describes an applicant whose physical condition does not 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 their activities, hobbies, or avocations (i.e., scuba diving, skydiving, etc.).

Declined Risk

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

Insurable Interest

describes the financial or emotional relationship between two or more parties justifying one owning a life insurance policy on the other. People are said to have an unlimited insurable interest in their own life. Insurable interest may exist in another person's life if there is a chance of a financial or emotional loss at that person's death. The insurable interest must exist at the time of policy issue.

Underwriter

person who identifies, examines and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate.

Application

the Statement of information 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. Part I: General Applicant Information Part II: Medical and Health History Part III: The Agent's Report or Statement

Underwriting

the analysis of information obtained from various sources pertaining to an applicant for insurance and the determination of whether or not the insurance should be issued as requested, offered at a higher premium, or declined.

Age Change

the date halfway between birthdays when the applicant's age changes to the next higher age. With some insurers, the age is based upon the applicant's age at his nearest birthday. In others, it is based upon the age of his last birthday.

Backdating

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 get a lower premium. State laws usually limit the time to which policies can be backdated to six months. Backdating is not allowed in variable contracts due to the nature of the investment.

Adverse Selection

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

Attending Physician's Statement (APS)

these are used when the application or medical examiner's report reveals conditions or situations, past or present, about which more information is desired. Because of Physician/Patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company underwriter.