Life Section 3
Statements made by an applicant for a Life insurance policy that are supposed to be true are referred to as: A. Warranties B. Representations C. Facts D. Information
B—Representations Explanation: Insurance law only requires that applicants answer questions by stating the TRUTH TO THE BEST OF THEIR KNOWLEDGE. These answers are called representations. Warranties, which are sworn statements of truth, are not required
A prospect's statements made in the application for insurance constitute a part of which of the following? A. Incontestability Clause B. Co-insurance Clause C. Consideration Clause D. Subrogation Clause
C—Consideration Clause Explanation: The Consideration Clause states, "In consideration of the premium paid and the statements and answers contained herein, I hereby apply for Life Insurance with .......". The Incontestability Clause states that the insurance company may not contest a claim for any reason after the policy has been in force for two consecutive years. The Subrogation Clause has to do with Liability insurance and the Co-Insurance Clause has to do with Major Medical (Health) insurance.
If an application for Life insurance is not complete: A. The insurer will issue the policy and request additional information B. The insurer will consider it to be void C. The insurer will reject it D. The insurer will return it to the producer
D— The insurer will return it to the producer Explanation: Incomplete applications will be returned to the producer, who then must meet with the applicant for completion. If an insurer issued a policy based upon incomplete information, they may be waiving their rights to contest a claim within the 2-year contestability period.
With proper notice and authorization, insurers may report underwriting information that an applicant lists on their application for Life insurance to the: A. Anyone who requests it B. Medical Information Bureau (MIB) C. State insurance department D. Fair Credit Reporting Association
B—Medical Information Bureau (MIB) Explanation: Virtually all Life and Health insurers are members of the MIB. Member insurers report their customers' medical history to the MIB, who in turn, makes it available to underwriters. However, MIB procedures require that written notice be given to applicants that their health data will be reported by the insurer to the MIB.
Once completed and signed by the applicant, a producer may change an application: A. If the applicant initials the change B. With the verbal consent of the applicant C. At anytime D. With consent of his manager
A—If the applicant initials the change Explanation: Applications can never be changed without the written consent of the applicant. They would have to either re-sign the application or initial the change.
A producer completes an application for Life insurance and sends it to the underwriter who approves it and issues the policy. When is coverage effective: A. On the date the client signed the application B. When the producer delivers the policy and picks up the premium C. Immediately D. On the date the underwriter approved the application
B—When the producer delivers the policy and picks up the premium Explanation: On the state exam, don't assume that the premium has been paid. A producer may send the underwriter a 'submittal' application, just to find out if the applicant is insurable. If the underwriter issues the policy, coverage would start when the producer delivers the policy and picks up the premium, along with a Statement of Continued Good Health.
An insurable interest must exist when: A. Death benefits become payable B. Policy ownership is transferred C. At all times D. A Life insurance policy is cancelled
B— Policy ownership is transferred Explanation: You can assign (or transfer) your Life insurance policy to anyone you want, as long as that person has an insurable interest in you. For example, if you have a terminal illness, you can sell your policy to an investor for cash (known as a 'viatical settlement'). You would then assign the ownership of your policy to the investor, who would now have an economic insurable interest in you. As the new owner of your policy, the investor would then name themselves as beneficiary, so when you die, the proceeds would go to them.
A producer sends a completed and signed application along with the check for the initial premium to the underwriter, who notices that the applicant forgot to sign the check. When would coverage start? A. When the underwriter received the application and unsigned check B. When the producer delivers the policy and picks up a signed check along with a Statement of Continued Good Health C. On the date the application was signed D. The date of the conditional receipt
B— When the producer delivers the policy and picks up a signed check along with a Statement of Continued Good Health Explanation: There is never any coverage without the money. Remember, consideration is a requirement of a legal contract. The applicant's consideration is the premium paid plus the answers on the application, which are required to be the truth to the best of the applicant's knowledge (representations).
Which federal law governs consumer investigative reports: A. Fair Credit Reporting Act B. Employee Retirement Income Security Act C. Telephone Communication Protection Act D. Privacy Protection Act
A— Fair Credit Reporting Act Explanation: The Fair Credit Reporting Act is a federal law that regulates consumer investigative reports, also known as credit reports.
Which of the following is true when the insurer issues a 'rated' policy: A. It is considered to be a counteroffer B. Coverage is effective immediately C. It is considered to be acceptance of the risk D. No additional premiums will be due
A— It is considered to be a counteroffer Explanation: Normally, it is the applicant who makes the offer to buy and it is the underwriter who accepts the risk when they issue the policy. However, when the underwriter makes a counteroffer, it is now up to the applicant to either accept it or reject it. Underwriters make counteroffers either in the form of 'rated' policies or by issuing a policy with an exclusion attached, such as for dangerous hobbies, occupations or health conditions.
A producer takes an application from a proposed insured without receiving payment of the first premium. The insurance company issues the policy and, when the producer visits the proposed insured to deliver it, she realizes that the health of the applicant has deteriorated significantly since the application was taken. The producer should: A. Refuse to deliver the policy or to accept any premium offered B. Deliver the policy as it was issued C. Obtain the premium from the prospect and send it to the company immediately D. Rate the policy and obtain any additional premium required
A— Refuse to deliver the policy or to accept any premium offered Explanation: Remember, due to lack of consideration, no valid contract exists yet. Therefore, the producer, who is bound to protect the company, should refuse to deliver the policy or accept any premium offered.
An insured's premium for Life insurance is based mainly upon their: A. Risk classification B. Occupation C. Gender D. Age
A— Risk classification Explanation: Underwriting is also known as 'risk classification', which includes an applicant's age, gender, occupation and hobbies. There are 3 main risk classifications: 1) preferred risk (such as a non-smoker), who receives the lowest rate; 2) standard (or average) risk, which is the category that most people fall under; and 3) non-standard (such as a person with a dangerous hobby or health problem), who pays a premium surcharge (or 'rate-up').
Insurable interest must exist: A. Continuously B. At the time of application C. In order to be named as beneficiary D. At the time of loss
B— At the time of application Explanation: On Life insurance, insurable interest must exist at the time of application, but not necessarily at the time of loss. For example, you buy a policy to cover your spouse, naming yourself as beneficiary. If you get divorced, the policy is still valid, even though you no longer have an insurable interest in your ex-spouse. Further, a beneficiary need not have an insurable interest in order to collect proceeds. Remember, you can name any one you want as beneficiary.
When giving a client a conditional receipt, which of the following is true? A. You never collect a premium until you deliver the policy B. In order for coverage to begin the applicant must pay all premiums C. The coverage will begin at earliest as of the date of application or when the client passes a physical, whichever is later D. Coverage begins as of date of application
C— The coverage will begin at earliest as of the date of application or when the client passes a physical, whichever is later Explanation: When you give out a conditional receipt you are only giving it out because you have collected the client's first premium payment and the application. The client that receives a conditional receipt is now conditionally covered. There may be no conditions to complete, in which case coverage is effective as of date of application. If there are conditions to satisfy, then coverage is effective when the conditions are satisfied. The most common condition is that the client must pass a physical. When you give out a conditional receipt, coverage will be effective as of date of application or when the client passes the physical exam (if one is required), whichever is later.
If an applicant for a Life insurance policy is found to be a substandard risk, the insurance company is most likely to: A. Require a yearly medical exam B. Refuse to issue the policy C. Charge an extra premium D. Lower its insurability standards
C—Charge an Extra Premium Explanation: Most clients are insurable, it's just a matter of selecting the proper premium to match the risk being undertaken. When the client completes the application and writes a check for the first premium, he is making an "offer" to buy insurance from the company. If the company declines to write coverage at the premium quoted, they may offer to do so at a higher price. This would constitute a counteroffer by the company. The applicant would then have the right to accept or reject the new offer.
A producer submits a completed and signed application to the underwriter along with the first premium check. After checking the results of the physical exam, the underwriter issues a 'rated' policy. Which of the following will not be required? A. A new completed and signed application B. A statement that the applicant's health has not changed since the physical exam C. An explanation of the rating or premium surcharge to the client D. Additional premium to be collected at policy delivery
A— A new completed and signed application Explanation: When the underwriter issues a 'rated' policy, they are making a counteroffer. The applicant now has the choice of either rejecting the counteroffer, or accepting it by paying the additional premium required. No new application is required.
If an existing client of a producer wants to buy another Life insurance policy, the producer should: A. Have the customer come in and complete and sign a new application B. Submit an unsigned application to the insurer referring to existing underwriting information C. Advise the customer that no physical exam is required since he is an existing client D. Complete and sign the application on behalf of the customer
A— Have the customer come in and complete and sign a new application Explanation: When selling any new Life insurance, even to an existing customer, a producer should always have their customer compete and sign a new application.
Life insurance becomes effective when: A. When the conditions in the conditional receipt are satisfied B. When the producer signs the application C. When the insurer receives the application at their home office D. The applicant writes the check and receives a conditional receipt
A— When the conditions in the conditional receipt are satisfied Explanation: One of the conditions in a conditional receipt requires that the applicant pay the initial premium before coverage can start. However, there may be other conditions specified in the conditional receipt, such as passing a physical exam.
All of the following are a part of a Life insurance policy, EXCEPT the: A. Conditional Receipt B. Insuring Clause C. Copy of the application D. Incontestability Clause
A—Conditional Receipt Explanation: Under the Entire Contract provision, a copy of the insured's application for Life insurance is attached to the policy. If it weren't, any false answers (misrepresentations) by the insured would not be admissible in court, since they would not be part of the entire contract. However, the Conditional Receipt is NOT part of a Life insurance policy. It is part of the application, and is torn off and given to the applicant when he pays his initial premium at the time of application.
On May 8th a prospect filled out an application for a life insurance policy but paid no premium. The insurance company approved the application on May 14th and issued the policy on May 15th. The producer delivered the policy on May 26th and collected the first premium. The coverage became effective on: A. May 14th B. May 26th C. May 8th D. May 15th
B— May 26th Explanation: No valid contract can exist without Consideration, which in this case, was not offered until the policy was delivered on May 26th. Had the initial premium been collected when the application was first completed on May 8th, coverage COULD have been effective at that time assuming the applicant met all the requirements contained in the company's Conditional Receipt. All contracts must contain four essential elements: 1) Consideration, 2) Offer, 3) Acceptance, and 4) Legal Purpose & Capacity. (Remember: C-O-A-L)
In the formation of a Life insurance contract, the special significance of a Conditional Receipt is that it: A. Serves as proof that the producer has determined the applicant to be fully insurable for coverage by the insurance company B. Is intended to provide coverage on a date earlier than the date of the issuance of the policy C. Is given by the producer only to applicants who fully prepay all scheduled premiums in advance of policy issue D. Guarantees the applicant that a policy will be issued in the amount applied for in the application
B— Is intended to provide coverage on a date earlier than the date of the issuance of the policy Explanation: The Conditional Receipt is just that, conditional. This means that coverage is conditional upon the applicant meeting all of the underwriting requirements of the company and paying the premium. If the applicant does meet all the conditions, then it is possible that coverage could begin as early as the date of application.
An applicant has been denied insurance coverage because of information contained in a consumer report. According to the Fair Credit Reporting Act, all of the following statements are true about this situation, EXCEPT: A. The reporting agency cannot issue any report containing adverse information about the applicant that predates the report by more than seven years, except in the case of a bankruptcy, which may be reported for a 14-year period B. The applicant has the right to obtain the identity of other inquirers who have obtained consumer reports on him within the past six months from the reporting agency C. The applicant has the right to obtain a copy of the consumer report directly from an insurance company that used the report D. The applicant has the right to obtain disclosure of the substance of the information in the consumer report from the reporting agency
C—The applicant has the right to obtain a copy of the consumer report directly from an insurance company that used the report Explanation: The Fair Credit Reporting Act is a federal law that is designed to protect individuals who are being investigated by Consumer Reporting Agencies or Credit Bureaus. The law requires pre-notification of any possible investigation and post-notification if any adverse underwriting action is taken by the company as a result of the information received from a credit bureau. An applicant for insurance also has the right to request a copy of the credit report that the company obtained.