Unit 2 - Life/Health Insurance Underwriting
Which of the following criteria may be used when determining the premium rate for an insurance applicant?
AGE No person or insurer may refuse to issue or renew insurance to anyone or charge different rates because of race, color, religion, national origin, or sex. However, it is permissible to charge different rates to different individuals when the rates can be justified through valid actuarial tables. Age may be considered a valid justification for charging individuals different rates.
An applicant for health insurance completes the application and satisfies all of the conditions of the conditional receipt. If the policy is eventually issued as applied for, coverage takes effect
JUST AS IF THE POLICY HAD ALREADY BEEN ISSUED If the initial premium was paid with the application, the applicant satisfies all of the conditions of the conditional receipt, and the policy is eventually issued as applied for, coverage takes effect just as if the policy had already been issued.
During the underwriting process, an insurer may do all of the following EXCEPT
VERIFY THE APPLICANTS MILITARY RECORDS, IF ANY An agent must explain to his client that, during the underwriting process, the insurer may contact the Medical Information Bureau to check on the applicant's medical history. In addition, an insurer may order a credit report to determine whether the client is a good credit risk and may order a consumer report to provide details on the applicants reputation, character, and habits.
A consumer may make a written request for complete disclosure of the nature and scope of an investigative report regarding her credit history. The disclosure must be made within
5 DAYS Consumers have the right to view the information contained in any investigative reports that have been ordered in conjunction with an application for life or health insurance. The consumer's request must be in writing and the disclosure must be made in writing within 5 days after the receipt fo the consumer's request.
An attending physician's statement (APS) requested by the underwriting department will normally contain all of the following applicant information EXCEPT
A MEDICAL INFORMATION BUREAU REPORT An attending physician's statement is often requested from any physician identified in the application who has treated the applicant. The request will ask for the applicant's current medical condition and medical history with the physician, as well as copies of the applicants medical records. A Medical Information Bureau (MIB) report would contain insurer underwriting information from any insurer to whom the applicant has previously submitted an application. Physicians would not have access to this information.
All of the following are forms of unfair discrimination EXCEPT
CHARGING ONE PERSON A HIGHER PREMIUM THAN SOMEON ELSE OF THE SAME AGE AND SEX BECAUSE OF A HIGHER RISK REPRESENTED BY THAT PERSON Unfair discrimination exists when two people of equal risk are charged different rates solely because of a difference in race, religion, national origin, or where they live. It would not be unfair discrimination to charge one person a higher premium than someone else of the same age and sex because of a higher risk represented by that person.
Which of the following situations would create a possible errors and omissions liability to the producer?
DURING THE SALE OF A REPLACEMENT HEALTH POLICY, THE PRODUCER TELLS AN APPLICANT THAT THE NEW POLICY WILL COVER EXPENSES ORDINARILY PAID BY MEDICARE The producer selling the replacement policy has engaged in misrepresentation, which is illegal. Health policies exclude coverage for benefits that are covered by Medicare. the producer has exposed himself to error and omissions liability as well as possible license suspension or revocation.
Which of the following does NOT appear in the producer's report?
EDUCATION The producer's report contains information based on the agent's knowledge of the insured and is used as an additional underwriting resource. The report is never seen by the insured and is not attached to the policy or application at issuance.
What kind of policy will protect an insurance agent against liability arising out of acts committed in her professional capacity?
ERROS AND OMISSIONS Under errors and omissions (E&O) insurance, the insurer agrees to pay for claims arising out of the errors and omissions of the insured agent. it is a professional liability insurance policy.
Penalties for violating the Fair Credit Reporting Act include
FINES, ACTUAL DAMAGES SUFFERED BY THE CONSUMER, PUNITIVE DAMAGES, AND REASONABLE ATTORNEY'S FEES Violators of the Fair Credit Reporting Act may be subject to fines and imprisonment and may be required to pay any actual damages suffered by the consumer, punitive damages, and reasonable attorney's fees.
All of the following are penalties for violating the Fair Credit Report Act EXCEPT
LOSS OF LICENSE INDEFINITELY Violators of the Fair Credit Reporting Act may be subject to fines, imprisonment, or both. They may also be required to pay any actual damages suffered by a consumer, punitive damages awarded by a court, and reasonable attorney's fees.
Which of the following would NOT constitute unfair discrimination in insurance underwriting?
MARIA IS CHARGED A HIGHER PREMIUM BASED ON HER POOR HEALTH Insurers may discriminate against poor risks by rating or declining them, particularly for poor health. National origin, religion, race, and residence, however, may not be used in insurance underwriting; to do so would constitute unfair discrimination.
All of the following can directly affect the amount of premium an individual insured pays EXCEPT
MARITAL STATUS For any individual, occupation, age, and sex are factors considered in developing a life insurance premium. Marital status is not, since it does not directly affect a person's proposed lifespan.
All of the following are considered suspicious activities EXCEPT
RECEIPT OF CASH PAYMENTS IN EXCESS OF $5,000 One of the suspicious activities an insurer must report is the receipt of cash payments in excess of $10,000, not $5,000.
The concepts of agent accuracy and completeness would prohibit all of the following practices EXCEPT
REVIEWING THE COMPLETED APPLICATION WITH THE APPLICANT TO ENSURE ACCURACY Applications should always be reviewed with the applicant before submission to ensure accuracy and completeness. Correcting errors without the applicant's knowledge, knowingly skipping questions, and rewording answers are all improper practices.
Which of the following statements pertaining to the Fair Credit Reporting Act is NOT correct?
THE FAIR CREDIT REPORTING ACT IS A STATE LAW THAT HELPS TO ENSURE ACCURATE REPORTING OF INFORMATION ABOUT CONSUMERS The Fair Credit Reporting Act is a federal law, not a state law.
Which of the following statements regarding how to fix a mistake in an insurance application is NOT correct?
UNDER NO CIRCUMSTANCES MYA AN AGENT CORRECT INFORMATION ON AN INSURANCE APPLICATION ONCE IT HAS BEEN COMPLETED BY THE APPLICANT In certain circumstances, an agent may correct an insurance application after it has been completed. If an applicant makes a mistake in the information he has given an agent, the applicant can have the agent correct the information on the application, but the applicant must initial the correction. An insurer may cancel a policy if it believes that a mistake on the application was an intentional deception about a fact material to the issuance of the policy.
An insured that meets the average health and life expectancy anticipated by the insurer for a person of that age and gender would be classified as
A STANDARD RISK Standard risks meet the average health and life expectancy anticipated by the insurer. Preferred risks represent excellent health and below-average risk of loss to the insurer. Standard, preferred, and substandard would all be accepted and insurable risks.
An investigative consumer report is also called a
AN INSPECTION REPORT An investigative consumer report, also known as an inspection report, is a general report on an applicant's finances, character, hobbies, work, health, and other habits. The information is usually obtained through interviews with friends and associates.
Anna applied for a $2 million life insurance policy and paid the first premium but was later found to be uninsurable. The agent gave her a receipt that guarantees coverage until the insurer formally rejects her application. Which type of receipt did Anna receive?
BINDING With a binding receipt, coverage is guaranteed, even if Anna is later found to be uninsurable, until the insurer formally rejects the application. However, because the underwriting process can take several weeks, this can place the insurer at considerable risk. Accordingly , binding receipts are almost never used in life insurance.
Which of the following situations would create a possible errors and omissions liability to the producer?
DURING THE SALE OF A REPLACEMENT HEALTH POLICY, THE PRODUCER TELLS AN APPLICANT THAT THE NEW POLICY WILL COVER EXPENSES ORDINARILY PAID BY MEDICARE. The producer selling the replacement policy has engaged in misrepresentation, which is illegal. Health policies exclude coverage for benefits that are covered by Medicare. The producer has exposed himself to errors and omissions liability as well as possible license suspension or revocation.
Which of the following statements regarding a conditional receipt is CORRECT?
IT IS GIVEN ONLY IF THE INITIAL PREMIUM HAS BEEN SUBMITTED WITH THE SIGNED APPLICATION The conditional receipt means that if the coverage is accepted as applied for and an initial premium is submitted with the application, the policy will be in force from the date the application is signed. The receipt is not provided simply by completing the application. At the time of policy delivery, the policy would have already been approved and coverage would no longer be conditional. It is also not given pending acceptance of additional riders and changes in the policy.
If a life insurance applicant is given a binding receipt, when does her coverage become effective?
ON THE DATE THE RECEIPT IS GIVEN Under a binding receipt (or temporary insurance agreement), coverage is guaranteed at the time of application for the amount of insurance applied for. The temporary coverage continues until the policy is issued as requested, until the company offers a different policy, or until the company rejects the application, but in no event for more than 60 days from the date the agreement was signed.
An agent must notify the applicant that all of the following sources will be used to assess the applicant EXCEPT
PERSONAL REFERENCES Agents must inform prospective insureds that the most common sources of underwriting information include the application, the medical report, an attending physician's statement, the Medical Information Bureau, special questionnaires, inspection reports, and credit reports. Personal references are not required.
Lawrence signed an application for a life insurance policy on September 2, and took a required medical exam on September 4. He gave the agent a check for the initial premium and received a conditional receipt at the time of application. The policy was issued as originally applied for and the agent delivered the policy to him on October 15. The earliest effective date for Lawrence's insurance policy would be:
SEPTEMBER 4 The condition receipt explains to the applicant that the policy will be issued subject to the approval of the insurance company. If the policy is eventually issued as originally applied for, typically, the earliest effective date is the date the applicant has completed all of the requirements. In this instance the applicant was required to complete a medical exam as part of the requirements, so the earliest effective date would be the date the medical exam was completed. The date the policy is actually delivered to the insured is immaterial.
With regard to life insurance applications, which of the following statements is CORRECT?
THE APPLICATION INCLUDES THE NAMES OF THE INSURED AND THE BENEFICIARY All applications for life insurance are not necessarily accompanied by a medical exam; in fact, substantial amounts of life insurance are written by insurers on a non-medical basis. Part I of the application solicits information about the proposed insured's personal and occupational history. Part II of the application involves the proposed insured's medical history.
Which of the following statements pertaining to the Fair Credit Reporting Act is NOT correct?
THE FAIR CREDIT REPORTING ACT IS A STATE LAW THAT HELPS TO ENSURE ACCURATE REPORTING OF INFORMATION ABOUT CONSUMERS. The Fair Credit Reporting Act is a federal law, not a state law.
Coverage for a health insurance policy will take effect just as if the policy had already been issued if all of the following conditions have been met EXCEPT
THE POLICY HAS BEEN LEGALLY DELIVERED TO THE APPLICANT If the initial premium was paid with the application, the applicant satisfies all of the conditions of the conditional receipt, and the policy is eventually issued as applied for, coverage takes effect just as if the policy had already been issued. It is not necessary for the policy to be legally delivered to the applicant for coverage to take effect.
With regard to substandard life insurance risks, which of the following statements is CORRECT?
WHEN THE APPLICANT REPRESENTS A SUBSTANDARD RISK, THE POLICY MAY BE MODIFIED TO REDUCE THE BENEFITS PROVIDED. To take into account the above-average exposure involved with a substandard risk, insurers may charge a higher premium or make an adjustment in regard to the benefits involved. An individual can be deemed a substandard risk based on physical condition, occupation, or moral hazards (risky habits). For most insurers, substandard or declined risks represent a small percentage of applicants.
A consumer may make a written request for complete disclosure of the nature and scope of an investigative report regarding her credit history. The disclosure must be made within
5 DAYS Consumers have the right to view the information contained in any investigative reports that have been ordered in conjunction with an application for life or health insurance. The consumer's request must be in writing, and the disclosure must be made in writing within 5 days after receipt of the consumer's request.
Which of the following statements pertaining to a life insurance policy application is CORRECT?
AN AGENT MUST BE VERY SPECIFIC WHEN LISTING AN APPLICANT'S OCCUPATION ON AN APPLICATION An agent must be very specific when listing an applicant's occupation and duties on the application because of the insurer's need to evaluate job hazards that may affect insurability. An applicant whose age is erroneously shown to be younger than his actual age will receive a premium quote that is lower than it should be. both the applicant and the agent must sign the application. The application is considered a valid offer only when the initial premium is received/
Which of the following situations is the best example of unfair discrimination?
AN INSURER ASSIGNS A PREMIUM RATING TO AN APPLICANT BECAUSE OF STUDIES THAT SUGGEST MEMBERS OF THE APPLICANT'S RACE HAVE A SHORTER THAN AVERAGE LIFE EXPECTANCY Unfair discrimination occurs when an insurer charges two people of equal risk different rates or provides disparate services or benefits based solely on differences in race, religion, physical ability, national origin, or location of residence.
On August 1, Roger completed an application for a major medical policy, gave his agent a check for the initial premium, and received a conditional receipt from the agent. No medical examination was required. On August 3, the agent submitted Roger's application and premium to the insurance company. On August 12, the agent received Roger's policy from the insurance company. Which of the following statements concerning this situation is CORRECT?
ROGER'S COVERAGE BEGAN WHEN HE RECEIVED THE CONDITIONAL RECEIPT The conditional receipt provides that when an 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 examination, if one is required
Coverage for a health insurance policy will take effect just as if the policy had already been issued if all of the following conditions have been met EXCEPT
THE POLICY HAS BEEN LEGALY DELIVERED TO THE APPLICANT If the initial premium was paid with the application, the applicant satisfies all of the conditions of the conditional receipt, and the policy is eventually issued as applied for, coverage takes effect just as if the policy had already been issued. It is not necessary for the policy to be legally delivered to the applicant for coverage to take effect.
An agent must notify the applicant that all of the following sources will be used to assess the applicant EXCEPT
PERSONAL REFERENCES Agents must inform prospective insureds that the most common sources of underwriting information included the application, the medical report, an attending physician's statement, the Medical Information Bureau, special questionnaires, inspection reports, and credit reports. Personal references are not required.
ERISA requires that certain benefit and insurance plan information be made available to all of the following EXCEPT
THE STATE LEGISLATURE Plan information, including important information about plan features and funding, must be provided to participants, their beneficiaries, the Department of Labor, and the IRS. Since ERISA is a federal law, informaiton does not need to be made available to the state legislatures.
Which of the following statements pertaining to sources of insurability information is CORRECT?
SPECIAL QUESTIONNAIRES ARE USED TO OBTAIN ADDITIONAL INFORMATION WHEN AN EXTRA HAZARD OR RISK MAY BE INVOLVED Special questionnaires are used to obtain additional information when an extra hazard or risk (IE skydiving may be involved. A medical report, if required, is completed by a physician or paramedic, not by the agent. An unfavorable credit report can be used to reject an applicant. Investigators interview individuals who are personally acquainted with the insurance applicant.
ERISA requires that certain benefit and insurance plan information be made available to all of the following EXCEPT
THE STATE LEGISLATURE Plan information, including important information about plan features and funding, must be provided to participants, their beneficiaries, the Department of Labor, and the IRS. Since ERISA is a federal law, information does not need to be made available to the state legislatures.
An applicant determined by underwriting to be declined would be
UNINSURABLE AT ANY PRICE A declined applicant is uninsurable at any priced. This is a risk the insurer is unwilling to insure.
With regard to substandard life insurance risks, which of the following statements is CORRECT?
WHEN THE APPLICANT REPRESENTS A SUBSTANDARD RISK, THE POLICY MAY BE MODIFIED TO REDUCE THE BENEFITS PROVIDED To take into account the above-average exposure involved with a substandard risk, insurers may charge a higher premium or make an adjustment in regard to the benefits involved. An individual can be deemed a substandard risk based on physical condition, occupation, or moral hazards (risky habits). For most insurers, substandard or declined risks represent a small percentage of applicants.
Which of the following statements pertaining to the Medical Information Bureau (MIB) is CORRECT?
INFORMATION OBTAINED FROM THE MIB BY INSURERS MAY NOT BE USED AS THE SOLE REASON TO DECLINE AN APPLICANT'S REQUEST FOR INSURANCE The purpose of the MIB is to reduce misrepresentation and fraud by sharing underwriting information with member insurance companies. Individual files contain facts such as hazardous occupations, poor driving records and medical history. For example, if information provided on an application is different than what is in an individual's MIB file, the insurer will conduct a further investigation. However, insurers cannot use information obtained from the MIB as the sole decision of whether or not to decline an applicant. Also, applicant's must sign a written authorization form indicating consent for information to be released to the insurer.
Louise applied for a $40,000 life insurance policy, paid the initial premium, and received a conditional receipt. Which of the following statements is NOT correct?
IF LOUISE DIED OF A HEART ATTACK 1 DAY BEFORE TAKING THE REQUIRED MEDICAL EXAM, THE INSURER WOULD STILL PAY THE BENEFICIARY THE COVERAGE AMOUTN STATED IN THE APPLICATION. In order for coverage to go into effect, the applicant must first complete all of the requirements, including payment of the initial premium. If the applicant's circumstances require a medical exam, the exam must also be completed before any coverage can go into effect. If all of the applicant's requirements have been met, the insurer will continue to underwrite the policy even if the applicant dies before the policy is issued. If the policy is issued as originally applied for, benefits will be paid to the designated beneficiary.
If an application for insurance is sent to the insurer without the first premium, but the premium is paid when the policy is delivered, the effective date of coverage is
THE DATE THE POLICY WAS ISSUED The effective date of coverage when an application is sent without the initial premium, but the premium is paid when the policy is delivered, is the date the policy was issued.
Anna applied for a $2 million life insurance policy and paid the first premium but was later found to be uninsurable. The agent gave her a receipt that guarantees coverage until the insurer formally rejects her application. Which type of receipt did Anna receive?
BINDING With a binding receipt, coverage is guaranteed, even if Anna is later found to be uninsurable, until the insurer formally rejects the application. However, because the underwriting process can take several weeks, this can place the insurer at considerable risk. Accordingly, binding receipts are almost never used in life insurance.
What is the purpose of the Fair Credit Reporting Act?
IT REQUIRES CONSUMER REPORT AGENCIES TO ADOPT REASONABLE PROCEDURES WHEN EXCHANGING CREDIT INFORMATION The Fair Credit Reporting Act is a federal law that ensures confidential, fair, and accurate reporting of information about consumers, including applicants for insurance. It does not preclude insurance companies from obtaining outside reports; however, it allows consumers to request the disclosure of information contained in these reports.
Lawrence signed an application for a life insurance policy on September 2 and took a required medical exam on September 4. He gave the agent a check for the initial premium and received a conditional receipt at the time of application. The policy was issued as originally applied for and the agent delivered the policy to him on October 15. The earliest effective date for Lawrence's insurance policy would be
SEPTEMBER 4 The conditional receipt explains to the applicant that the policy will be issued subject to the approval of the insurance company. If the policy is eventually issued as originally applied for, typically the earliest effective date is the date the applicant has completed all of the requirements. In this instance the applicant was required to complete a medical exam as part of the requirements, so the earliest effective date would be the date the medical exam was completed. The date the policy is actually delivered to the insured is immaterial.
AGC Publishing applied for key-person life insurance on its chief executive officer. Which of the following parties must sign the application?
THE CEO, ANOTHER OFFICER OF AGC, AND THE AGENT HANDLING THE APPLICATION Each life insurance application requires the signatures of the proposed insured and the agent who solicits the application. If the policy owner is a firm or corporation, one or more partners or officers other than the proposed insured must sign the application. As a result, the CEO, another officer of AGC, and the agent handling the application must all sign the insurance application.
