Life insurance exam- Unit 2: underwriting

collecting the premium

-An "offer to buy" insurance exists 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.

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

attending physician's statement (APS)

-An underwriter may ask the proposed insured's regular doctor for an Attending Physician's Statement (APS) to find out about the applicant's current condition and medical history with the physician -The underwriter may also ask for copies of medical records.

consumer reports

-Consumer reports are 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.

statement of good health

-During the delivery appointment, the agent/producer must collect the first premium if it was not paid at the time of application -Additionally, the policyowner must sign a statement of good health attesting that their health is the same as when they applied for the policy. *** -required if no premium w/ application -if health changed--agent can't deliver policy

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.

fiduciary responsibility (ERISA)

-ERISA mandates very detailed standards for fiduciaries and other parties-in-interest of employee welfare benefit plans, including group insurance plans -This means that anyone with control over plan management or plan assets of any kind must discharge that fiduciary duty solely in the interests of the plan participants and their beneficiaries -strict penalties are imposed on those who do not fulfill this responsibility.

reporting & disclosing (ERISA)

-ERISA 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. -Examples of the types of information that must be distributed 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.

classification of risks

-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. -After applicants are evaluated, they are sorted into groups, or classified, according to the level of risk each represents -There are generally four classifications: standard, preferred, substandard (rated), declined

completeness

-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 and the application was incomplete, 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 from the application.

medical examinations & testing

-Insurers will underwrite some 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 -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.

producer's report

-Part III of a life insurance application is the Producer/Agents Report, or Producer's Statement -The producer 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. -The proposed insured does not see the Producer's Report -It is not attached to the policy and the application when it's issued -The producer's report will be signed only by the producer.

preferred

-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.

backdating

-Some insurers allow an application to be backdated so the premium can be based on an applicant's earlier age and lower the cost of the premium -Backdating would permit a 41-year old applicant to purchase a life insurance policy using the age of 40 -Most state laws allow life insurance applications to be backdated up to six months. -if an application is backdated, the policy becomes effective as of the date requested on the application. -To receive a less expensive premium, the applicant must pay any additional premiums that would have been paid from the backdate.

standard

-Standard risks mean 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.

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

STOLI/IOLI

-Stranger-Owned Life Insurance (STOLI) -Investor-Owned Life Insurance (IOLI) --these transactions are 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. -Seniors generally receive some financial inducement for this arrangement: an upfront payment, a loan or a small continuing interest in the policy death benefit -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. *** -banned in most states -investors named as beneficiaries

substandard

-Substandard risks 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 -Substandard risks can only be accepted by charging them higher rates -Substandard risks are sometimes referred to as being rated up (sometimes shortened to just rated). -Methods of charging a relatively higher rate for substandard risks include adding a flat additional charge, charging applicants the standard premium for a higher attained age, or reducing the benefits provided by the policy.

HIPAA disclosures

-The 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 -If any health information will be shared, applicants must be given full notice of: ■ the insurer's information-sharing practices; ■ their right to maintain privacy; and ■ an opportunity to refuse to have their information released.

AIDS considerations

-The applicant's sexual orientation cannot be used in the underwriting process or to determine insurability. However, 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. -Similar to other required health examinations, AIDS tests are also paid by the insurer.

the application

-The application used to purchase life insurance asks the applicant for basic information -There are three parts to an application. ■ Part 1—General Information ■ Part 2—Health Information ■ Part 3—Producer's Report

sources of information

-The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurer -the application is an underwriter's primary source 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 geographical location --Requires insureds written consent --Cannot be reported to the MIB *Medical Information Bureau--Application cannot be denied solely on MIB information --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

general info

-The first part (Part 1) of the application asks for general or personal data regarding the insured. For example: ■ Name ■ Address ■ Date of birth ■ Gender ■ Social Security number ■ Driver's license number ■ Marital status ■ Income ■ Occupation and business address ■ Type of policy and face amount being applied for ■ Beneficiary ■ Other insurance owned -in addition, if the applicant is someone other than the insured, the applicant's name and address will also be requested.

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.

anti-money laundering provisions of the USA Patriot Act

-The overall purpose of the USA PATRIOT Act is to deter terrorist activity, both globally and in the United States in particular -One of the ways it does that is by establishing measures to prevent, detect, and prosecute international money laundering and financing of terrorism -Under the USA PATRIOT Act, 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 -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 -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; STOLI / IOLI *greater interest in the early termination features of a product rather than its potential performance *fictitious identification or reluctance to provide identification; and maximum borrowing against a product's value soon after it is purchased *** -designed to prevent & detect money laundering & financing of terrorism -report suspicious activity

health information

-The second part (Part II) of the application is designed to obtain information about the insured's physical condition and habits: ■ 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

personal delivery

-When a policy is issued, it must be delivered to the policyowner -It can be mailed, but in most companies it is the producer's responsibility to deliver it in person -In some states, producers must obtain a receipt from the policyowner acknowledging that the policy was delivered and the date. *** agent delivery--will usually get a signed receipt on delivery to the policyowner

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 required. -If 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 delivered. *** -terms of conditional receipt is issued -substandard & pays additional premium= date of policy -no receipt= policy delivery date if premium paid at delivery

receipts

-When the first premium is collected at the time of application, the producer must provide the applicant with a receipt -The effective date of coverage will depend on the type of receipt issued: conditional or binding

changes in application

-a correction can be made if a producer finds they have mistakenly recorded applicant information -the applicant must certify that an error occurred and place their initials next to the correction -Some insurers also require the producer to initial any change *** -must be initialed by the applicant

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. -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 -The types of information maintained in MIB files include medical history, hazardous jobs or hobbies, and poor driving records. purpose of MIB is to reduct instances of misrepresentation & 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.

The Fair Credit Reporting Act requires which of the following to be issued to all applications for life or health insurance? -a notice to the applicant -a financial disclosure statment -a free credit check -all of these must be issued to applicants

-a notice to the applicant

While delivering the policy, the producer must obtain a signed document that the insured's health is the same as when he or she applied for the insurance policy. This document is called

-a statement of good health

A general report in regard to the applicant's finances, health, character, work, hobbies, and other habits that is usually completed by interviewing friends and associates is known as

-an investigative consumer report

Which of the following is used to determine a consumer's eligibility for personal credit, insurance, or employment?

-consumer report

company underwriting

-each ins. company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk -info used to evaluate the risk of an applicant for ins. will depend on the type of coverage involved

binding receipt

-effective for 30 to 60 days from the date of application even if the applicant is found to be uninsurable -Binders are most often used with auto or homeowners insurance and rarely with life insurance. -Life insurance binders are called temporary insurance agreements -the insurer can either issue a policy or cancel the binder before the end of the stated period.

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 *** -protects participants in employee benefit plans -qualified pension plans & group insurance -reporting & disclosure information for plan participants

confidentiality

-highly personal information about an applicant is acquired during the application process -agents need to inform applicants that the information they share will be kept in the strictest confidence and producers must never violate that confidence. -completed applications must be kept out of others' sight except for company representatives and the information gathered should never be the subject of idle talk.

completing the app

-important responsibility for producer/agent -info in app is the basis for issuing the policy, which in turn provides the client with valuable benefits -producers must approach the completion of the app with an eye toward confidentiality, accuracy, & completeness

accuracy

-in the interest of both the applicant and the insurer, producers must be conscientious about getting and recording the correct answer to every question on the application -the company underwriter is relying upon application accuracy to correctly assess and rate this business

A risk that represents a chance of experiencing a loss that is below average and therefore favorable to the company is a

-preferred risk

other errors & omissions situations

-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.

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 -in the insurance industry, investigative consumer reports are also called inspection reports

Most states allow backdating to be done on an insurance application for

-up to 6 months

federal laws & regulations applied to both life & health insurance: Fair Credit Reporting Act (FCRA)

1) The federal Fair Credit Reporting Act 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. -All insurers and their producers must comply with the federal Fair Credit Reporting Act regarding information obtained from a third party concerning the applicant. -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. 2) A 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 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. 3) 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. Insurance companies may use consumer reports, or investigative consumer reports, to compile additional information regarding the applicant. 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. 4) Penalties 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. The maximum penalty for obtaining consumer information reports under false pretenses is $5,000, imprisonment for one year, or both *** -3rd party information -notice to applicant REQUIRED -consumers have rights & can dispute information in files -penalty: fines (max $5,000) and/or imprisonment (one year)

underwriting

=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 & the agent completes the app for ins. & submits it to the company underwriter -agent/producer is frequently referred to as the field underwriter -critical part of the ins. application process -info that is gathered enables ins. co. to properly classify & determine premiums for prospective insureds -underwriters determine the amount of risk an applicant poses for the company & whether the co. wants to accept or decline that risk -work closely w/ actuaries, risk managers, & claims managers to protect the company from potential claims -also determine which new risks are going to be profitable & which clients are worth retaining

conditional receipt

=the date of the application is the effective date, as long as the applicant is found to be insurable under the company's standard underwriting rules -Most conditional receipts are effective on the date of the application, or the date of a required medical examination, whichever is later of these two events. -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). *** -premium paid w/ app -ins. effective--date application completed & signed or medical exam (whichever later of) -must be standard or preferred risk (can be determined after death)

All of the following statements about completing the insurance application are correct EXCEPT... A. any change to an application must be initialed by the applicant B. the application form must be signed by both the applicant, proposed insured (if not the applicant) and producer/agent C. the producer's report must be signed by both the applicant, proposed insured (if not the applicant) and producer/agent D. collecting the first premium with the application is the quickest way to get coverage in force

C

Which of the following imposes a requirement that the insurer must keep all medical information confidential and protect the applicant's privacy?

HIPAA

selection criteria & unfair discrimination

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) -In addition, most states prohibit unfair discrimination against individuals who are blind, or victims of domestic violence.

Which of the following is a non-profit insurance trade association that maintains underwriting information on applicants from hundreds of insurers?

Medical Information Bureau

required signatures

The application form--signed by the applicant and the producer/agent. -The proposed insured must sign if the applicant is not the insured -A company officer must sign a corporation owned policy -A parent or legal guardian signs a juvenile policy for the minor.

Under which of the following receipts is coverage effective as of the date of the application as long as the applicant is found to be insurable under the company's standard underwriting rules?

conditional receipt

Which of the following is NOT included in the general form of the insurance application?

height & weight

During the underwriting process, medical exams and testing are paid for by the

insurer

which of the following factors is NOT prohibited from use in order to classify a risk?

martial status

A part of the application that requires the agent to provide information regarding the proposed insured, such as habits, character, and relationship with the insured is known as a

producer's report

The section of the application that includes information regarding the proposed insured's physical condition, medical history, and alcohol and drug use is known as

second part--health information

A risk that bears the same health, habits, and occupational characteristic as the persons on whose the mortality table was based upon is known as a

standard risk

which of the following is an above average risk of loss & unfavorable to an insurance company?

substandard

which of the following ind. is NOT required to sign the app form?

the beneficiary

The process of evaluating a risk to determine if the risk is one that the insurance company wishes to insure is also known as the

underwriting process