Chapter 7: Underwriting and Policy Issue

changes on Application

- must be complete throughly, honestly, accurately and signed by insured and witness, when the applicant makes a mistake in info given to agent in completing the app, the applicant can have the agent correct the info, but the applicant must initial the correction if mistake is found, company returns application to agent, the agent then corrects the mistake with the applicant and has the applicant initial the change

inspection reports

- obtained by insurance companies on applications who apply for large amounts of life insurance and contain information about prospective insureds to determine insurability - usually get these from national investigative agencies or firms and may contain info by phone call to proposed insured -purpose is to get general character and reputation, mode of living, finances and any exposure to abnormal hazards. may interview other people in applicants life as well as applicant -may include credit report -when used in connection with insurance app, the applicant has right to receive copy of report -insurer must give notice, explain and allow opting out to the applicant -inspection reports are not requested on applicants who apply for smaller policies, although company rules vary as to the sizes of policies that require report y outside agency -According to Fair Credit Reporting Act, the insurance co must inform prospective insured Fair Credit Reporting Act of 1970- protects consumers who an inspection or credit report is being done on, this federal law applies to financial institutions that request these types of consumer reports, insurance co fall under this

Credit Reports

- some applicants may prove to be poor credit risks, based on previous info before issued policy -credit reports are valuable underwriting tool in many cases -questionable credit ratings can cause an insurance company to lose money, those with poor credit are likely to allow policies to lapse over short time, perhaps before 2nd premium- this will lose money for the company because the insurer's expenses to acquire the policy cannot be recovered in short period -

Policy Effective Date

- when does policy become effective? this is important bec a. not only does it identify when coverage is effective, but establishes the date by which future annual premiums must be paid - if receipt (binding or conditional) was issued in exchange for payment of 1st premium deposit, the date of the receipt will be noted as policy effective date in contract -if premium deposit is not given with app, then the insurer will decide the date effective, often date when policy is issued, but wont be fully effective until delivered to applicant, 1st premium is paid and statement of good health is obtained

Explaining the Policy to clients

-agents should deliver in person to remind the applicant of all that is in document; in person the agent can review contract, provisions, exclusions and riders -agent's review helps reinforce the sale and prevents potential lapse, can lead to future sales by building the client's tust and confidence in agent's abilities - this is also able to avert misunderstandings, policy returns and potential lapses

Privacy Notice

HIPAA- privacy rule that provides federal protection for indiv health info, when an agent submits an application that reveals personal info of applicant, the agent is responsible for providing the insurance applicant with privacy notices - producers must secure HIV consent form from the applicant in applicable situations and communicate that blood tests may be required, meaning any blood taken will be screened for HIV, the applicant must be made aware they will be tested for it and applicant provides permission to do so

Medical Info Bureau

MIB will identify life insurance in force with other carriers as well as lifestyle and habits like drug use. Bureau formed by more than 700 members of insurance companies -serves as reliable source of medical info concerning the applicant and helps disclose cases where an applicant either forgets or conceals pertinent underwriting information or submits misleading info -discloses lifestyle like drug use, drinking, overeating, smoking -MIB helps to keep down cost of life insurance for all policyowners through prevention of misrepresentation and fraud. Info collected by MIB may be disclosed to physician - if company finds that one of the applicants has a physcial issue listed by the MIB, company must report to MIB in code numbers, now the underwriters will know for the future in case they reapply

Tax treatments of health insurance premiums and benefits

Premiums are tax deductible- paid before your paycheck is taxed or removed from taxable income when you file taxes, in this case the benefits will be taxed since you avoid taxes on the premiums OR Premiums are not tax deductible- paid after your paycheck is taxed and benefits would be tax free

constructive delivery

accomplished if 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 agent did not personally deliver

point of service plan

allows insured to choose either an in network or an out of network provider at the the time care is needed with in network care- care within network of dr and hospitals all care is coordinated by insured's primary care physican, which includes referrals to specialists an insured receiving out of network care usually pays more of cost then if had been in netowrk

Proper Solicitation

an agent has duty to solicit good business, agent's focus should be on cases that fall withinthe insurer's underwriting guidelines and represent profitable business to insurer agent also has responsibility to insurance-buying public to observe the highest professional standards when conducting insurance business - an agent is required to deliver to the applicant a LIfe Insurance Buyer's Guide and a Policy Summary, these documents are usually delivered before the agent accepts -buyers guide is a generic publication that explains life insurance in a way that the average consumers can understand -policy summary addresses the product being presented for sale, identifies agent, insurer, policy, riders, info about premiums, dividends, benefit amounts, cash surrender values, policy loan interest rates and life insurance cost indexes of policy NOTE DIFF BETWEEN BUYERS GUIDE AND POLICY SUMMARY

Preferred Risk

many insurers reward good risks by assigning to a preferred risk classification companies issue this type with reduced premiums with the expectation of better than normal mortality or morbidity experience -characteristics that contribute are not smoking, weight within an ideal range, and not drinking an insurance applicant with a below-average likelihood of loss is typically considered to be a preferred risk- weird wording but means that they have low likelihood of loss

Special Questionnaire

may be required to provide detailed info about aviation, foreign residence, finances, military service, osscupation. they company needs info if you are an active skydiver and how often to determine insurability, more common is one about the amount of time you spend flying

unfair discrimination

no insurer is permitted to engage in any unfair discrim regarding applicants for health insurance, sex orientation, religious preference, geographical location are prohibited life insurance underwriting factors because they are unfairly discriminatory

USA patriot act

requires companies to establish formal anti-money laundering programs, purpose is to detect and deter terrorism, insurance is a way for people to get money through cash-surrender, put dirty money in and take clean money out

community rating

requires health insurance providers to offer health insurance policies within a given area at the same price to all individual or group plans without medical underwriting, regardless of health status

Standard Risk

term used for indiv who fit insurer's guidelines for policy issue without special restrictions or additional rating indiv meet same conditions as the tabular risks on which premium rates are based

completing the application

-application is one of the most important sources of underwriting information and it is the agent's responsibility to see that it is completed fully and accurately. -insurance company will return the application to the agent if the agent submits an incomplete application -statements made in the application are sued by insurers to eval risks and decide whether or not to insure the life of the applicant -****statements are representations*** representations are statements an applicant makes as being substantially true to the best of the applicant's knowledge and belief, not exact in every detail, must be true only to the extent to which they are a material risk Warranties are statements that are guaranteed to be correct -not literally true in every detail, even if made in error, is sufficient to render policy void. if rejected based on representation, need material proof, representations are considered fraud only when they relate to material to the risk and when they were made with fraud intent each app needs signiture of the proposed adult insured, the policyowner (iff diff from insured) and agent who solicits application, needed to represent the statements as true to the best of the applicant's knowledge - by reading and signing application, the applicant should realize that any false statements on an insurance application could lead to loss of coverage - agent must sign form saying that disclosure statement has been given to applicant, another signed to allow insurance to gather info medically, investigative, physicians, etc the name of the insurance company and the agent's name and license id number must appear on application

Initial Premium and Receipts

-best for the proposed insured and agent to have the first premium paid with application and forwarded to insure, for agent this helps soldify the sale and may accelerate the payment of commissions on the sale. -insured benefits become effective immediately with some restrictions -if a premium is not paid with the application, the agent should submit the application to the insurance company without the premium, the policy will not become valid until the initial premium is collected - for insurance contract, consideration is the first premium payment plus the application; an insurer will not allow an applicant to possess a policy without receipt of the initial premium Policy Premiums would be higher than a standard premium when the insured does not meet established underwriting requirements

Conditional Receipts

-most common type of premium receipt; this indicates that certain conditions must be met in order for the insurance coverage to go into effect -this provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam Ex. if applicant dies and proves to be uninsurable on specified date, then the coverage takes no effect and the premium is refunded`

applicant ratings

-once all info is in, the underwriter seeks to classify the risk that the applicant poses to insurer -this is risk classification - if risk is so great, the applicant is considered uninsurable and app is rejected but majority will fall in insured category

substandard risk

-one below the insurer's standard or average risk guidelines, indiv can be rated as substandard for: poor health, dangerous occupation or attributes and habits that could be hazardous - some substandard applicants are rejected -others will be accepted for coverage but with an increase in their policy premium Anything below this is considered uninsurable, potential of loss to insurance co is too high- terminal illness, too many chronic conditions, if too risky the applicant will be denied but may charge extra premium, attach exclusion or rider or waiver or limit the type of policy coverage instead of outright rejection

1. The Application

basic source of insurability info, first to be reviewed and evaluated Part I-General: asks general questions about the proposed insured, including name, age, address, birth date, sex, income, marital status and occupation Details about the coverage are also included in Part I: type of policy, amount of insurance, name and relationship of beneficiary, other insurance the proposed insured owns, additional insurance applications the insured has pending, are they a smoker? what hobbies do they participate in? Part II-Medical focuses on the proposed insured's health and asks a number of questions about the health history, not just of proposed insured but of the family, depending on proposed policy face amount, this section may not be all required for medical; may need exam or provide blood test/urine test Part III- Agent's Report: where agent reports personal observations about proposed insured, agent needs to be truthful becasue they represent the insurance co, the agent provides additional info about applicant financal condition and character, the background and purpose of sale, and how long the agent has known applicant, does the proposed insurance replace an exisiting policy? Medical Report: under 50-100,000 may not reqire additional medical info other than what is provided by the application. For larger policies, need more info. may need a statement from physician who has treated applicant if there are questions raised about condition, may need signiture,

Binding Receipts

coverage is guaranteed until the insurer formally rejects the application, even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application. - this can place company under serious risk since the process takes a couple weeks - often these receipts are reserved for most experienced agents - often states max payable during special protection period temporary insurance agreement- extends coverage immediately, coverage remains in effect during the entire underwriting process, if he applicant dies, claim will be paid but insurer has the right to cancel coverage if the application is denied

backdating

if applicant can be treated by insurance co as being a year younger, the result can be slightly lower premiums lifelong; purpose of backdating in life insurance is to use premiums based on earlier age, making the policy effective at an earlier date than the present - many insurers are willing to let an applicant backdate ("save age"), but insurer must allow backdating, company will usually impose a time limit on how far back its backdated (6 months usually) and policyowner is required to pay all back-due premiums and the next premium is due at the backdate anniversary date once the company issues the policy, the insurance contract is sent to sales agent for delivery to the applicant

obtaining a statement of insured's good health

if the premium is not paid until the agent deliveries the policy, common co practice requires, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to continued good health -agent then submits the premium with signed statement to insurance co - there can be no contract until the premium is paid; co has right to know policyowner has remained in good health from policyowners sig of application to receiving the policy (meaning, does the applicant have SAME risk as when applied for policy?)

Purpose of Underwriting

issuing someone a policy who is uninsurable will result in a financial loss for the company, an underwriter has the repsonsibility to protect the insurer against adverse selection Each insurer determines insurable vs uninsurable risk, each applicant is reviewed individually to see if they meet requirements it is ***risk selection- process of reviewing the main characteristics that make up the risk profile Underwriter must: -establish insurable interest then ask: Is the applicant insurable? -have to develop a risk profile of an applicant, number of sources are checked usually depending on size of policy, and some things that might stand out to the underwriter. need: medical report, application, phsician's statement, medical information bureau, special questionnaires, inspection reports and credit reports If the applicant is insured by two different people, does an insurable interest exist between the two of them? Field Underwriting performed by the producer involves completing the application and collecting the initial premium

insurable interest

it exists when the death of the insured would have clear financial impact on the policyowner, indiv have insurable interest in themselves Question arise with third party contracts (where applicant is not the insured). some relationships are automoatically presumed to qualify as insurancle interest are spouses, parents, children, certain business relationships. Insurable interest cannot be established sufficiently by sentiment alone Must be established at the inception of contract, not necessarily when the proceeds are paid, one may not purchase life insurance on another without consent (unless minor) exists: -in oneself -in husband or wife -parents in children - child in parent or guardian -business in lives of officers, directors, key employees -business partners in each other -creditor in the life of a debtor (but only to the extent of debt)