Ch 2: Life/Health Insurance Underwriting

The maximum penalty for obtaining consumer reports under false pretenses is:

$5,000.00, imprisonment for one year, or both.

Part 1 - General Information

- Name, address, date of birth, gender, social security number, driver's license number, marital status, income, marital, occupation and business address, type of policy and face amount being applied for, beneficiary, other insurance owned.

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 a consumer, punitive damages awarded by a court, and reasonable attorney's fees.

Part II - Health Information

Height and weight, Tobacco usage, Drug usage, International travel, Current medical treatments (details of most recent office visit), Medications being taken, Conditions the insured has sought treatment for or been diagnosed with in the past, History of disability claims, Health conditions prevalent in the insured's family, High-risk hobbies, Name and address of current physician

Underwriting Guidelines

Help the underwriter determine whether or not the company should accept the risk.

Inspection Reports

Investigative consumer reports.

The types of information maintained in MIB files:

Medical history, hazardous jobs or hobbies, and poor driving records.

An insurer's anti-money laundering program

Must be headed by a compliance officer responsible for implementing the program, include ongoing training of appropriate individuals within the company, and be independently tested to assure its effectiveness.

Changes in the Application

Must be initialed by the applicant

Company Officer

Must sign a corporate owned policy.

Three parts of the application

Part 1—General Information Part 2—Health Information Part 3—Producer's Report

Producer/Agents Report or Producer's Report

Part III of a life insurance application. Records information that pertains to the proposed insured including the producer's relationship to the proposed insured and anything the producer knows about the proposed insured's: financial status, habits, and character. Will only be signed by the producer. Not attached to policy.

Backdating

Premium can be based on an applicant's earlier age and lower the cost of the premium. The policy becomes effective as of the date requested on the application, up to 6 months.

The application form

Signed by the applicant and the producer/agent.

Parent or legal guardian

Signs a juvenile policy for the minor.

Classification of Risks

Standard, Preferred, Substandard or rated, Declined. Every life insurance company has different underwriting guidelines that determine what risk class an individual qualifies for. The company will look at an applicant's personal medical history, smoker status, height/weight profile, medical exam results, family history, motor vehicle record, and any hazardous activities.

Conditional Receipt

The date of the application or medical exam is the effective date.

Applications on a medical basis

The insurer usually requires the proposed insured to take a medical examination for larger death benefit amounts. These exams can be conducted by a registered nurse, paramedic, and some applicants are required to have a doctor's examination with stress testing, scans, EKG's, MRI's, etc. The amount of death benefit determines the type of examination and testing required by the insurer. The insurer pays for medical exams and tests that are requested during the underwriting process.

Information Practices

The life insurance producer must comply with the requirements for notifying applicants about the insurer's privacy policy as it relates to the personal information collected during the application process and how it will be used.

Underwriting

The process of evaluating a risk to determine if it is acceptable based on established insurance company guidelines. Everything begins with the producer/agent when a decision to buy is made and the agent completes the application for insurance and submits it to the company underwriter.

When member companies discover unfavorable information about an applicant during their underwriting process:

They report it to the MIB using codes signifying certain conditions. If the applicant applies for insurance elsewhere, other members companies will have access to this information.

Attending Physician's Statement (APS)

Underwriter source of information from the proposed insured's regular doctor to find out about the applicant's current condition and medical history with the physician.

Consumer Reports

Used to determine a consumer's eligibility for personal credit (credit report) or insurance or for employment. They may be issued only to persons who have a legitimate business need for the information. Underwriters use an applicant's credit report to determine if they are reliable when paying their monthly bills. Issuers count on policyholders to pay their premium to defer the high initial costs to issue a life insurance policy. It can take several years for certain policies to become profitable for a life insurer.

Health Insurance Portability and Accountability Act (HIPAA)

Imposes specific requirements on the disclosure of insureds' health information by medical providers, insurers, and producers. Health information must remain confidential to protect an applicant's privacy.

The proposed insured

Must sign if the applicant is not the insured.

Investigative Consumer Reports

Reports containing information obtained by interviewing individuals who know something about the consumer such as associates, friends, and neighbors. Consumers must be notified and give their consent to having such reports done.

Substandard risks / Rated Up

Represent below average life expectancy, high-risk life insurance. A risk of loss that is above average and therefore unfavorable to the company. Unfavorable risk factors include poor health, dangerous occupation, or risky habits. Can only be accepted by charging them higher rates.

Disclosure Notification

State laws require that applicants be given advance written notice stating who is authorized to disclose personal information, the kind of information that may be disclosed, and the reason it is being collected.

Applications on a non-medical basis

When the death benefit applied for is below a certain level. These applications are evaluated on health information on the application.

Examples of the types of information that must be distributed according to the Employee Retirement Income Security Act include:

- a summary plan description to each plan participant and the Department of Labor; - a summary of material modifications that details changes in any plan description to each plan participant and the Department of Labor; - an annual return or report (Form 5500 or one of its variations) submitted to the IRS; - a summary annual report to each plan participant; and - any terminal report to the IRS.

If any health information will be shared, applicants must be given full notice of:

1. the insurer's information-sharing practices; 2. their right to maintain privacy; and 3. an opportunity to refuse to have their information released.

Statement of Good Health

A document the policy holder signs attesting that their health is still the same as when they applied for the policy. Required if no premium with application. If health changed—agent can't deliver policy

Medical Information Bureau

A non-profit insurance trade association that maintains underwriting information on applicants. According to the Federal Trade Commission, member MIB companies account for 99% of individual life insurance policies and 80% of health and disability policies issued in the U.S. and Canada.

Methods of charging a relatively higher rate for substandard risks:

Adding a flat additional charge, charging applicants the standard premium for a higher attained age, or reducing the benefits provided by the policy.

Classified

After applicants are evaluated, they are sorted into groups, or according to the level of risk each represents. There are generally four classifications.

Field Underwriter

Agent/Producer

Consumer Rights

Consumers who feel that information in their files is inaccurate or incomplete may dispute the information, and the reporting agencies may be required to reinvestigate and correct or delete information. If applicants feel that the information compiled by the consumer inspection service is inaccurate, they may send a brief statement to the reporting agency with the correct information.

USA PATRIOT Act

Deters terrorist activity, both globally and in the United States in particular. Establishes measures to prevent, detect, and prosecute international money laundering and financing of terrorism. Companies that issue permanent life insurance, annuities, or other products that have cash value or investment features must adopt procedures and internal controls for recognizing and reporting potential money-laundering activities.

Policy Review

During the delivery appointment, the producer will review with the policyowner the policy, riders, exclusions, and other details to make sure they understand it. The producer should also answer any pertinent questions the policyowner has about the policy they purchased.

With conditional receipts, if the proposed insured dies before a policy is issued, the application continues through the normal underwriting process and one of the following will occur:

If the deceased insured meets the company's standard underwriting requirements and a policy would have been issued had they lived, the policy is in force and the death benefit will be paid to the beneficiary. If the insured is found to be uninsurable or a substandard risk, no coverage would be in force. The premium that was collected with the application will be returned to the policyowner or beneficiary (in the case of death).

Binding receipt (aka Temporary Insurance Agreement)

Provides coverage as soon as premium is received (before approval). Effective for 30 to 60 days from the date of application even if the applicant is found to be uninsurable. Most often used with auto or homeowners insurance and rarely with life insurance.

Insurers must not unfairly discriminate between individuals who are in the same risk class. Specifically, use of any of the following is considered unfair discrimination:

Race Religion National origin Place of residence (the area where someone lives) Most states prohibit unfair discrimination against individuals who are blind, or victims of domestic violence.

AIDS Considerations

Specific questions about being diagnosed with AIDS (Acquired Immune Deficiency Syndrome) or ARC (AIDS-related complex) to determine a medical condition can be asked. AIDS testing can be required with the applicant's written consent. They must be informed about the purpose of the test and that the results are reported to the insurer. If the results are positive, a report is sent to the Medical Information Bureau (MIB) that an individual has abnormal blood test results. The presence of aids is never revealed, reported, or shared and can only be released to persons designated by the applicant, such as a particular physician. If the applicant does not designate a medical provider, state law may require the results to be forwarded to the state's Department of Health. AIDS tests are paid by the insurer.

Receipts

When the first premium is collected at the time of application, the producer must provide the applicant with a this document. The effective date of coverage will depend on the type of __________ issued.

Disclosure Form

By signing this, the applicant is giving the insurer consent to gather and disseminate information as described in the notice.

Preferred risks

Represent excellent health. A risk of loss that is below average and therefore favorable to the company. Favorable risk factors include such things as healthy lifestyle, clean medical history, or low-risk occupation. These risks may be insured at preferred or discounted rates.

The types of financial inducements Seniors receive for Stranger-Owned Life Insurance (STOLI) or Investor-Owned Life Insurance (IOLI) transactions

Seniors generally receive some financial inducement for this arrangement: an upfront payment, a loan or a small continuing interest in the policy death benefit.

Underwriting Sources of Information

■ Application—primary source ■ Medical exams & testing ■ Attending physician statement (APS) ■ AIDS testing - Applications may not ask about sexual orientation - Testing not based on geo- graphical location - Requires insureds written consent - Cannot be reported to the MIB ■ Medical Information Bureau - Application cannot be de- nied solely on MIB informa- tion - Insured must be informed of MIB - MIB gets its information from insurance companies ■ Consumer reports - Insured must be informed ■ Investigative reports - Insured must give consent

The types of suspicious activity that insurers must report include:

- receipt of any cash payment in excess of $10,000; - purchase of insurance that is not consistent with the customer's needs; - requests to have refund or surrender proceeds or other benefits paid to a party not clearly related to the purchaser; - greater interest in the early termination features of a product rather than its potential performance; and - fictitious identification or reluctance to provide identification; and maximum borrowing against a product's value soon after it is purchased.

Agent Delivery

Will usually get a signed receipt on delivery to the policyowner. In some states, producers must obtain a receipt from the policyowner acknowledging that the policy was delivered and the date. The agent/producer must collect the first premium if it was not paid at the time of application.

Declined

An insurer's underwriting guidelines indicate that an applicant is not insurable at any price. In such cases, the application or risk is declined

Standard risks

Average health and normal life expectancy and fall into the normal range anticipated by the company when it established its premiums. These risks can be insured for standard rates.

Incomplete applications

Cause a delay in the underwriting process because they must be returned to the agent for completion. This means the applicant will wait longer without needed insurance protection. All the required information must be available for review by the underwriting department before a policy can be approved and issued. If a policy is issued, the underwriter on behalf of the company waives its right to that information. If a claim arises, the company cannot deny it based on the fact that information was missing.

EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA)

Enacted to protect the interests of participants in employee benefit plans as well as the interests of the participants' beneficiaries. Much of the law deals with qualified pension plans, but some sections also apply to group insurance plans. Requires that certain information concerning any employee welfare benefit plan, including group insurance plans, be made available to plan participants, their beneficiaries, the Department of Labor, and the IRS.

Stranger-Owned Life Insurance (STOLI) or Investor-Owned Life Insurance (IOLI) transactions

Life insurance arrangements involve investors who persuade seniors to take out a new life insurance policy, with the investors named as the beneficiary. The investors often loan money to the insured to pay the premiums for a specific period of time. Often times, that is two years based on the life insurance policy's contestability period. After that period, the insured names the investor as beneficiary of the policy.

Notice to Applicant

Must be issued to all applicants for life or health insurance coverage. This notice informs the applicant that a report will be ordered concerning their past credit history and any other life or health insurance for which they have previously applied. The agent must leave this notice with the applicant along with the receipt. - This required notice must be given to the consumer no later than three days after a report was requested. - A consumer may make a written request for a complete disclosure of the nature and scope of the investigation underlying the report. Disclosure must be made in writing within five days after the date on which the consumer's request was received.

The purpose of the MIB

Reduce instances of misrepresentation and fraud. Insurers may not make an adverse underwriting decision (such as rejecting the applicant) solely on the basis of information from the MIB. Insurers may only use this information to further their investigation. Insurers do not report underwriting decisions to the MIB. This prevents other member insurers to accept or reject an applicant based on what other insurance companies have done. An applicant must be given written notice that information may be reported to and obtained from the MIB, and insurers must get an applicant's written authorization to do so. Applicants must also be notified that applying for insurance or filing a claim with another company may trigger the release of MIB information.

Fair Credit Reporting Act (FCRA)

Requires consumer reporting agencies to adopt reasonable procedures for exchanging information on credit, personnel, insurance, and other subjects in a manner that is fair and equitable to the consumer with respect to the confidentiality, accuracy, relevancy, and proper use of this information. a. All insurers and their producers must comply regarding information obtained from a third party concerning the applicant. b. Reports on consumers are prohibited unless the consumer is made aware that an investigative consumer report may be made, and that such report may contain information about the person's character, reputation, personal characteristics, and lifestyle.

Producers are liable for their mistakes, including misstatements and promises of coverage. They must take special care to follow established procedures when:

Taking applications; explaining coverages; collecting premiums; amending policies; and submitting claims.

Effective Date of Coverage

When the first premium is collected at the time of application for a policy, the effective date of coverage is the date of application or the date of the medical exam, if it was reqIf the proposed insured is found to be a substandard risk, the policy that is issued will require substandard/higher premiums because the initial application for insurance was forwarded with a standard premium. If the applicant declines the substandard policy and does not pay the additional premium, coverage has never been in effect. If the applicant accepts the substandard policy and pays the additional premium, the effective date of coverage is the date the policy was issued. If an application for insurance is sent to the insurer without the first premium, but it is paid at policy delivery, the effective date of coverage is the date the policy was issued.

An "offer to buy" insurance

When the first premium is submitted with the life insurance application. If no premium is submitted with the application coverage is delayed until the premium is paid for the issued policy. If the insured becomes uninsurable or dies between the time when the application is submitted and the first premium is collected, the policy will pay no benefit.

Insurance companies may use consumer reports, or investigative consumer reports to:

compile additional information regarding the applicant.

Most states are banning STOLI transactions because

the investor as a beneficiary does not have insurable interest in the insured and it has become a method of fraud targeted at senior citizens.