XCEL Chapter 5: Life insurance underwriting and policy issue

Applicant ratings

once all the information about a given applicant has been reviewed, the underwriter seeks to classify the risk that the applicant poses to the insurer. This is evaluation is known as risk classification.

Buyer's guide

provides general information about the types of life insurance policies available, in language that can be understood by the average person. This is whole life, this is term life this is what variable life means, etc.

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).

Premiums and receipts

Agents should make every effort to collect the initial premium with the application. However, if premium is not collected with the application, the policy will not become valid until the initial premium is collected.The agent issues the applicant a premium receipt upon collecting the initial premium.The only time a customer will receive a receipt is if they pay their initial premium at the time of application. No receipt will be given at any other time.

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.

Representation

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

Part 1 of the application

* General Information - Age, DOB, Sex, Address, Marital Status, Occupation, * Details about the requested insurance coverage: - Type of policy - Amount of insurance - Name and relationship of the beneficiary - Other insurance the proposed insured owns * Other information personal information - Tobacco use - Hazardous hobby - Foreign travel - Aviation activity - Military service

The most common sources of underwriting information include:

1. The application 2. The medical report 3. Attending physician's statement 4. The Medical Information Bureau 5. Special Questionnaires 6. Inspection Reports 7. Credit Reports

Medical Information Bureau (MIB)

The MIB is a nonprofit trade organization which maintains medical information about individuals. Information from the MIB is used by life and health insurers.

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.

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.

Policy summary

provides specific information about the policy purchased, such as the premium and benefits. Mom calls you excited because she bought new health insurance. This allows you to quickly see what "health insurance" specifically did she buy: Medicare Supplement, Major Medical, Critical Illness, Long-term Care.

Personal delivery

allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personal delivery also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy.

2 types of premium receipts

* Conditional Receipt: The producer issues a conditional receipt to the applicant when the application and premium are collected. * 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.

Application errors

* If an agent realizes that an applicant has made an error on an application, the agent must correct the information and have the applicant initial the changes * An incomplete application will be returned to the agent * The agent can NEVER change the application without the customer present to initial the changes

Application

The application is the starting point and basic source of information used by the insurance company in the risk selection. Although applications differ from company to company they all have the following same components. Insurable interest must exist between the policyowner and insured at the time when the application is made. Insurable interest exists when the death of the insured would have a clear financial impact on the policyowner.

Underwriting

is another term for risk selection. It is the process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums.

Backdating

is the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium.

Part 2 of the application

* 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.

Classifications of risk

Once all the information about a given applicant has been reviewed, the underwriter will utilize several different types of info in determining the insurability of the individual and the risk that the applicant poses to the insurer. This evaluation is known as risk classification. (Preferred - Low Risk - Lower Premiums) Lower risks tend to have lower premiums. Policy being issued with a preferred insurance premium: * Applicant is nonsmoker and/or nondrinker * Good personal/family health historyStandard - Average Risk - No Extra Ratings or Restrictions standard terms and rates Substandard - High Risk - Rated Up - Higher Premiums chronic conditions, insulin diabetes, heart disease Declined - Not Insurable - Potential of Loss to Insurance Company is Too High terminal illness, too many chronic conditions

Fair Credit Reporting Act of 1970

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.

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.

Field underwriting procedures

Field underwriting is completed by the agent. Unlike the insurer, the agent has face-to-face contact with the applicant, which can aid the insurer in risk selection. As field underwriters, agents help reduce the chance of adverse selection, assure that the application is filled out completely and correctly, collect the initial premium, and deliver the policy.

Signatures

The agent and the applicant are required to sign the application. If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application.

The statement of good health

verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application.

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.

Part 3 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 info, other than provided by the application. However, they require a medical report for further info.

Inspection report

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,the applicant has the right to receive a copy of the report.

Why is the effective date of coverage important?

it identifies when the coverage is effective and establishes the date by which future annual premiums must be paid.