Chapter 6: Health Insurance Underwriting

When an insurance application is taken by a producer, which of these statements is true?

Any changes made on the application require the applicant's initials * the producer should've the applicant initial any changes made on the application

Avocations

Certain hobbies an applicant may have (such as skydiving or mountain climbing) may increase his/her risk to the insurer

What action should a producer take if the initial premium is NOT submitted with the application?

Forward the application to the insurer without the initial premium * in this situation, the producer should submit the application to the insurance company without the premiums. However, if a premium is not paid with the application, the policy will not become valid until the initial premium is collected.

Which type of plan normally includes hospice benefits?

Managed care plans

USA Patriot Act

The 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.

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,

Why is an applicant's signature required on a health insurance application?

To attest that the statements on the application are accurate to the best of the applicant's knowledge

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.

An applicant's medical information received from the Medical Information Bureau (MIB) may be furnished to the:

applicant's physician * information received from the medical information bureau about a proposed insured may be released to the proposed insured's physician

morbidity

expected incidence of sickness or disability within a given group during a given period of time.

disability income insurance

premium payments on personally owned disability income policies are not tax deductible

Which mode of payment is NOT used by health insurance policies? - monthly premium - annual premium * single premium - semi-annual premium

single premium * single premium is not used when paying for health insurance policies.

P is self-employed and owns an Individual Disability Income policy. He becomes totally disabled on June 1 and receives $2,000 a month for the next 10 months. How much of this income is subject to federal income tax? - $20,000 - $24,000 - $6,000 * $0

$0 * disability income benefits that derive from an individual policy which was paid entirely by the policy owner is not subject to federal income tax.

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 III 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.

Part I of the Application - General

* 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 - Medical

* Medical Information - Health History o Part II 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.

expenses

- cover the cost of salaries, commissions, supplies and other administrative cost.

declined / Uninsurable risk

- if the underwriter feels that the applicant is too high a risk, the applicant may be declined. rejected and denied coverage. potential of loss to insurance company is too high - terminal illness, too many chronic conditions

Preferred risk

- reflect a reduced risk of loss and are covered at a reduced rate. EX: Non-smokers Low/Better than Average Risk - Lower Premiums - nonsmoker, weight within an ideal range, nondrinker

Substandard

- those that reflect an increased risk of loss. These applicants may be able to obtain health insurance coverage but at an increase premium - an applicant could be rated substandard for a poor health history or a dangerous occupation High Risk - Rated Up - higher premiums or restricted coverage - chronic conditions, insulin diabetes, heart disease

Medical Report

A 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).

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.

Physical Condition

An applicant's present physical condition is of primary importance when evaluating health risks

Which Federal law allows an insurer to obtain an inspection report on a potential insured?

Fair Credit Reporting Act * the FCRA of 1970, established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports

What is being delivered during a policy delivery?

Insurance contract to the proposed insured

primary premium factors

Morbidity, interest, and expenses are the primary factors that affect premiums in health insurance

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. 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.

Agent J takes an application and initial premium from an applicant and sends the application and premium check to the insurance company. The insurance company returns the check back to J because the check is made out to J instead of the insurance company. What action should J take?

Return to the customer, collect a new check made out to the insurance company, and send the new check out to the insurance company * if an agent receives a check made out to them instead of the insurance company, they should return the check to the customer and collect a new check properly made out to the insurance company

Which of these terms accurately defines an underwriter's assessment of information on a life insurance application? * risk classification - warranty review - insurable interest - inspection report

Risk classification * underwriting, another term for risk selection, is the process of reviewing the many characteristics that make up the risk profile of an applicant to determine if the applicant is insurable and, if so, at standard or substandard rates.

Which mode of payment is NOT used by health insurance policies? - monthly premium - annual premium * single premium - semi-annual premium

Single premium

Representation

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

Which of the following statements about the classification of applicants is INCORRECT? * substandard applicants are never declined by underwriters - substandard applicants are occasionally declined by underwriters - preferred risk applicants typically have better premium rates than standard risk applicants - an applicant can be classified as substandard risk because of a hazardous job

Substandard applicants are never declined by underwriters * A substandard risk is below the insurer's average risk guidelines. an individual can be rated substandard for a number or reasons and can even be rejected outright

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

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.

Which of the following BEST describes how pre-admission certifications are used? - used to assist in underwriting * used to prevent nonessential medical costs - used to minimize hospital lawsuits - used to help process claims

Used to prevent nonessential medical costs

Medical Information Bureau (MIB)

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.

Insurable Interest

a portion of every premium is invested by insruance companies to earn interest. This helps reduce premium payments • An insurable interest exists if the applicant is in a position to suffer a loss should the insured incur medical expenses or be unable to work due to a disability • As with life insurance, insurable interest is a prerequisite for issuing a health insurance policy • You have insurable interest in yourself • A producer may be the beneficiary of an applicant's policy of the producer has insurable interest on an insured

managed care

a strategy used by some health insurance companies in an attempt to contain rising health care costs by influencing which and how much health care is used by policy owners or subscribers. EX: if a covered person needs to go to the hospital, the managed care organization may require that the person receives approval before being admitted and allow the plan to determine, if hospitalization is necessary to if alternate treatments might be appropriate.

when underwriting health insurance policies, the prime considerations are:

age, gender, occupation, physical condition, avocations, moral and morale hazards, and financial status of the applicant

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.

classification of risk

once underwriters have collected and reviewed the necessary information on the applicant, they can make a decision to either accept or decline the applicant for insurance. the applicants that have been accepted, will fall into one of the 3 categories: - preferred - standard - substandard

medical expense insurance

policies or long-term care insurance policies, premiums paid by the tax individual policyholder are tax deductible as a medical expense

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.

Standard risk

reflect average exposures and may be insrued at standard rates and premiums Average Risk - No Extra Ratings or Restrictions - standard terms and rates

Age

• Generally, the older the applicant, the higher the risk. • Health insurance claims costs tend to increase as the age of the insured increases

History

• Medical history may point to the possibility of a recurrence of a certain health condition. • An applicant's family history may reflect a tendency toward certain medical conditions or health impairments.

Sex

• Men show a lower rate of disability than women, except at the upper ages • Women are sometimes required to undergo more expensive testing like a Pap test, which is used for detecting cervical cancer • Women have a longer life expectancy than men

Occupation

• Some types of work are more hazardous than others, the premium rates for a person's health insurance policy may be affected by their occupation. o There is little physical risk associated with professional persons, office managers, or office workers. o However, occupations involving heavy machinery, strong chemicals, or high electrical voltage, for example, represent a high degree of risk for the insurer. • Change of occupation provision: o if the insured changes to a less hazardous job, the insurer will return any excess unearned premium o if the change is to a more hazardous occupation, the benefits are reduced proportionately, and the premium remains the same

Moral Hazards

• The habits or lifestyles of applicants • Personalities and attitudes may draw attention in the underwriting process • Moral hazards include o Excessive drinking and the use of drugs represent serious moral hazards o Applicants who are seen as accident prone or potential malingerers (feigning a continuing disability in order to collect benefits) o Poor credit rating o Dishonest business practices

Premium Mode (Mode of Premium Provision)

• The policy feature that permits the policyowner to select the timing of premium payments • If the policyowner chooses to pay premium more than once per year, there may be additional charges because the company will have additional charges in billing and collecting the premium payments • For health insurance, premium payment options include o Annual o semi-annual o quarterly o Monthly • Unlike life insurance, there is no "single-pay" option for health insurance policies