Life Insurance - Application

Warranties on the Application

A statement the applicant guarantees to be true. Not required on life or health insurance applications.

Stranger Originated Life Insurance (STOLI)

An investor group initiates the insured's application. - Typically insured is paid a lump sum by the investors in exchange for allowing them to purchase life insurance on the insured. The strangers have an interest in the life (death) of the insured. The strangers pay premiums on the policy until the insured dies. STOLI's are subject to taxes. - The insured, who sold their owner's rights, owes taxes at ordinary income rates on the amount received, less the cost basis if any. - The investors owe taxes on the amount of the death benefit in excess of what was paid to the insured for the policy.

Investor-Originated Life Insurance (IOLI)

Another term for STOLI

Collecting Initial Payments

Applicant usually writes check for initial premium. If check bounces, no legal consideration exists. Contract is invalid until the money is paid.

Binders for Life & Health

Are NOT used. Binders are temporary insurance used in P&C only.

Delivering the Policy - Coverage

Coverage begins when all conditions have been satisfied or when the underwriter approves the application. Whichever happens first.

Representations on the Application

Doctrine of utmost good faith. This applies to insurer, insured, and the producer. Applicants must tell the truth to the best of their knowledge. Representations required of applicants. Failure to tell truth is a misrepresentation. Misrepresentations of a material fact may void policy. If a claim occurs during the first two years, incontestability clause. A material fact is one important to underwriting. Lying about an immaterial fact won't void a policy.

Concealments on the Application

Failure to disclose a material fact on the application. Could void the policy under the incontestability clause.

Federal Fair Credit Reporting Act

Federal law designed to protect applicant's privacy. Applies when ordering consumer reports on applicant. Insurer must give applicant pre-notification. Insurers also must obtain applicant's written consent to order report. If insurer takes adverse action based on the report... Post notification must be given to the applicant. Must state specific reason for adverse action. Must say where a copy of report may be obtained. Insurer need to give applicant a copy of report. if report is wrong, applicant may have it corrected.

Standard Risk Client

Has no dangerous avocations or health problems. - Avocation being hobby. Most applicants fit into this category. They pay the standard rate.

Protected Health Information

Health Data Name Address SSN Birth Date

HIV Consent

In order to perform an HIB Test, the insurer must have the client's written informed consent. HIV test results may only be disclosed to the applicant's doctor.

Credit Report

In order to pull a consumer report, the insurer must have the client's written informed consent in advance.

Estoppel

Inability to enforce legal rights once given up.

Consequences of Accepting an Incomplete Application

Incomplete applications are usually not accepted. Acceptance constitutes a waiver. Also constitutes an estoppel. If the insurer accepted an incomplete application they may be giving up their future rights under the incontestability clause.

Underwriting - Insurable Interest

Insurable interest must exist at time of application. It does NOT need to exist at the time of the claim. Policy owner must prove insurable interest exists. When buying a policy on someone other than themselves. Third party ownership situations. Insurable Interest may be based on economics or kinship. A business owner has insurable interest in a key person. A wife has insurable interest in her spouse or child. May not be based upon friendship. Everyone has an insurable interest in their own life. Insurable interest prevents gambling with life insurance.

What is a "rated" policy?

It is a counteroffer from the underwriter. A valid policy, but requires additional approval from the owner.

The application is the _______________________...?

Main source for underwriting information.

Nonstandard or Substandard Client

May have a health problem, dangerous hobby or occupation. Most clients are insurable, if they can afford it.

Completing the Application

Must be signed by the applicant and the producer. Must also be signed by the insured if other than the applicant. Should be completed by the applicant personally. Coupled with the premium, this is the applicant's offer to buy. Producers may never change a completed application. Incomplete applications are usually not accepted.

Delivering the Policy - Premium

Never any coverage unless the premium has been paid. Consideration is required for a valid contract! Applicant's consideration is the premium paid, plus the applicant's statements on application. Insurer's consideration is their promise to provide coverage in return.

Factors Underwriters May Use...

Occupation Avocations (hobbies) Age Gender Smoker/Nonsmoker Height Weight Health Factors

Issuing Conditional Receipts

Producer gives applicant a conditional receipt. Never given unless the premium is paid & application taken. Conditional receipt states that the coverage will begin. When all conditions, if any are satisfied. Physical exam may be required. No coverage until the underwriter approves. If there are no conditions to coverage. Coverage may begin immediately. The producer must explain any conditions to the applicant.

Explaining the Policy to the Client

Producer should personally deliver the policy to the client. If the policy was issued with a surcharge or an exclusion. - This is known as a counteroffer by the underwriter. - Applicant made offer, which was rejected... underwriter now makes counteroffer to the applicant. Counter offer must not be accepted by applicant. - No coverage exists unless counter offer is accepted. - Applicant must either pay an additional premium OR sign the exclusion endorsement or rider. Product must explain that the application may reject the counteroffer and receive a full refund of premium W/O COVERAGE. Fully explaining the policy coverage at time of delivery helps to prevent future misunderstandings.

Changes in the Application after Completion

Producers may never change a completed application. Unless the applicant initials the change. A producer's false statement concerning the applicant's health on an application is considered a misrepresentation.

Disclosures at Point of Sale - HIPPA

Requires that health plans notify their enrollees at time of sale of their privacy practices. Enrollees must also be made aware of their right to an additional copy of the privacy practices at minimum once every three years. Insurers must make a good faith effort to obtain written acknowledgement from enrollees of receipt of the privacy practices notice. The privacy notice must contain certain elements. The Privacy Rule is designed to assure that an individual's health information is properly protected, while allowing the flow of health information needed to provide and promote high quality health care and to protect the public's general health and well being. The Privacy Rule is designed to assure that an individual's health information is properly protected, while allowing the flow of health information needed to provide and promote high quality health care and to protect the public's general health and well being. Insurers may not use or disclose protected information unless: - The privacy rule permits or requires it, or - The individual, who is the subject of the information, authorizes the sharing in writing.

Risk Classification

Some clients present more risk than others. The average client is known as standard risk. The standard risk pays the standard rate. A nonstandard or substandard client pays a higher rate. Preferred Risk client receives a lower than standard rate. The underwriter classifies the risk with producer's help. This will assure that the insurer will receive correct premium for the risk presented by the applicant. Underwriters may add exclusions. - Such as aviation exclusions, student pilot, etc. Most risk classification is done by adding premium surcharges. Producer is considered the front line underwriter. They meet the client in person and in the best position to identify hazards. Underwriter may not use marital status as an underwriting factor for life insurance.

Preferred Risk

Standard rate is discounted. Applicant is better than average, like a nonsmoker.

USA PATRIOT Act / Anti-Money Laundering

The USA Patriot Act of 2001 was passed to increase the ability to prevent, detect, and prosecute international money laundering and the financing of terrorism. The Patriot Act amends the Bank Secrecy Act, which requires every financial institution to file a Currency Transaction Report (CTR) with the Financial Crimes Enforcement Network (FinCEN) within the Department of the Treasury, for each cash transaction that exceeds $10,000. This requirement also applies to the transfer of funds electronically, the purchase of certificates of deposit, stocks, bonds, and other investments. The Act also requires the reporting of wire transfers in excess of $3,000.

Applicant's Offer to Buy

The application along with the applicant's premium payment makes up the applicant's offer to buy.

Fraud on the Application

The intent to deceive the insurer. Could void the policy under the incontestability clause. Sometimes hard to prove. Life policies are totally incontestable after two years. EVEN IF Fraud is proven.

Contract is invalid until....

The money is paid.

Delivering the Policy - Offer and Acceptance

The offer is made by the applicant. Paying the premium and completion of the application are the applicant's offer to buy insurance. Acceptance is made by the underwriter. Acceptance occurs when the application is approved. Producer does not make the acceptance. Although the producer signs the application, the producer is NOT a party in the contract.

Waiver

The voluntary giving up of a legal right.

Delivering the Policy - Legal Purpose and Capacity

This is the fourth element to have a legal contract. The policy must be purchased for a legal purpose. The person buying the policy must be of legal age and of sound mind.

Risk

Uncertainty of loss or the change of loss.

Underwriting - MIB

Underwriters may order a Medical Information Bureau (MIB) Report. Insurers who are MIB members report adverse health information to the MIB. MIB Procedures require.... Written notice to applicant that health data will be reported by the insurer to the MIB. Authorization by the applicant for MIB disclosure. Disclosure to the applicant of data in MIB files upon written request of the applicant. Data will be disclosed to applicant's doctor only. Not to the applicant directly. Not to the producer directly. Not to the agency directly.

Underwriting - Consumer Reports

Underwriters may order a consumer report on an applicant. Verifies finances, credit history, and character. Supplements information contained on application. Supplied from private consumer reporting companies. Procedures are regulated by law.

C.O.D. Submittal Applications

Utilized when the producer thinks applicant may be rejected. No premium is collected. No conditional receipt is given. Underwriter reviews application. If approved, policy is issued. No coverage exists since no premium has been paid. Producer delivers the policy and collects premium. Coverage now begins. Producer also obtains from the client a statement of good health. Verifies applicant's health has not changed since date of initial submittal application.

Privacy Notice Elements

it must disclose the ways in which the insurer may use and disclose protected health information. The notice must state the insurer's duty to protect privacy, provide a notice of privacy practices, and abide by the terms of the current notice. The notice must describe individual's rights, including the right to complain to HHS (Health & Human Services) and to the insurer if they believe that their privacy rights have been violated. The notice must include a point of contact for further information and for making complains to the insurer.