Life and Health: Completing the Application, Underwriting, and Delivering the Policy

Elements of a Legal Contract

1. Agreement - offer and acceptance 2. Consideration 3. Competent parties 4. Legal purpose

Consumer Reports

cannot contain certain types of information if the report is requested in connection with a life insurance policy or credit transaction of less than $150,000.

A valid insurable interest when the policy is insuring:

1. Policyowner's own life 2. The life of a family member (a spouse or a close blood relative) 3. The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as a debtor to a creditor).

Fair Credit Reporting Act

A federal law that established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant and properly used. The law also protects consumers against the circulation of inaccurate or obsolete personal or financial information.

Representations

statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. Answers insured gives on the insurance application.

Insurance Transaction

- Solicitation - Negotiations - Sale (effectuation of a contract of insurance) - Advising an individual concerning coverage or claims (by mail or any other means)

Primary criteria an underwriter uses

- applicant's health (current and past) - occupation - lifestyle - hobbies or habits The underwriter will use many different sources of information in determining the insurability of the individual risk. The specific underwriting requirements will also differ by insurers.

Some "red flags" to look for in suspicious activity:

- customer uses fake ID or changes a transaction after learning that he or she must show ID - two or more customers use similar IDs - customer conducts transactions so that they fall just below amounts that require reporting or recordkeeping - two or more customers seem to be working together to break one transaction into two or more (trying to evade the Bank Secrecy Act (BSA) requirements) - customer uses two or more money service business (MSB) locations or cashiers on the same day to break one transaction into smaller transactions (trying to evade BSA requirements)

Warranty

An absolutely true statement upon which the validity of the insurance policy depends.

Contract

An agreement between two or more parties that is enforceable by law.

Conditional Contract

Requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations.

Agent's Report

The agent's report allows the agent to communicate with the underwriter and provide information about the applicant known by the agent that may assist in the underwriting process.

Changes in the Application

When an answer to a question on the application needs to be corrected, agents have the option, depending on which insurer they represent, of correcting the information and having the applicant initial the change, or completing a new application. An agent should never erase or white out any information on an application for insurance.

Disclosure Statements

Will help the applicants to make more informed and educated decisions about their choice of insurance.

Adverse Selection

insuring of risks that are more prone to losses than the average risk

Consideration

The binding force in a contract that requires something of value to be exchanged for the transfer of risk. The consideration on the part of the insured is the representations made in the application and the payment of premium; the consideration on the part of the insurer is the promise to pay in the event of loss.

Beneficiary

a person who receives the benefits of an insurance policy

Material Misrepresentation

A statement that, if discovered, would alter the underwriting decision of the insurance company. If they are intentional, they are considered fraud.

Medical Examinations

For policies with higher amounts of coverage or if the application raised additional questions concerning the prospective insured's health, the underwriter may require a medical examination of the insured. There are two options, depending on the reason for the medical examination: 1. The insurer may only request a paramedical report which is completed by a paramedic or a registered nurse 2. The underwriter may require an Attending Physician's Statement (APS) from a medical practitioner who treated the applicant for a prior medical problem.

Conditional Receipt Example

If an agent collects the initial premium from an applicant and gives the applicant a conditional receipt, and the applicant dies the next day, the underwriting process will proceed as though the applicant were still alive. If the insurer ends up approving the coverage, then the applicant's beneficiary will receive the death benefit of the policy. If, on the other hand, the insurer determines that the applicant was not an acceptable risk and declines the coverage, the premium will be refunded to the beneficiary, and the insurer is not required to pay the death benefit.

Agent field underwriter responsibilities during the underwriting process and beyond

- proper solicitation of applicants - helping prevent adverse selection - completing the application - obtaining the required signatures - collecting the initial premium and issuing the receipt, if applicable - delivering the policy

Suspicious Activity Report (SAR) Rules

Any company that is subject to the AML Program is also subject to SAR rules. SAR rules state that procedures and plans must be in place and designed to identify activity that one would deem suspicious of money laundering, terrorist financing and/or other illegal activities. Deposits, withdrawals, transfers or any other business deals involving $5,000 or more are required to be reported if the financial company or insurer "knows, suspects or has reason to suspect" that the transaction: - has no business or lawful purpose - is designed to deliberately misstate other reporting constraints - uses the financial institution or insurer to assist in criminal activity - is obtained using fraudulent funds from illegal activities - is intended to mask funds from other illegal activities

Investigative Consumer Reports

Are similar to consumer reports in that they also provide information on the consumer's character, reputation, and habits. The primary difference is that the information is obtained through an investigation and interviews with associates, friends, and neighbors of the consumer. Unlike consumer reports, these reports cannot be made unless the consumer is advised in writing about the report within 3 days of the date the report was requested. The consumer must be advised they have a right to request additional information concerning the report, and the insurer or reporting agency has 5 days to provide the consumer with the additional information. The reporting agency and users of the information are subject to civil action for failure to comply with the provisions of the Fair Credit Reporting Act. A person who knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses may also be fined and or imprisoned for up to 2 years.

Consequences of Incomplete Applications

Before a policy is issued, all the questions on the application must be answered. If the insurer receives an incomplete application, the insurer must return it to the applicant for completion. If a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived it's right to have an answer to the question. The insurer will not have the right to deny coverage based on any information that the unanswered question might have contained.

Required Signatures

Both the agent and the proposed insured (usually the applicant) must sign the application. If the proposed insured and the policyowner are not the same person, such as a business purchasing insurance insurance on an employee, then the policyowner must also sign the application. An exception to the proposed insured signing the application would be in the case of an adult, such as a parent or guardian, applying for insurance on a minor child.

Use and Disclosure of Insurance Information

Every applicant for a life insurance policy must be given a written disclosure statement that provides basic information about the cost and coverage of the insurance being solicited. This disclosure statement must be given to the applicant no later than the time the application for insurance is signed.

No premium =

No coverage

When Coverage Begins

If the initial premium is not paid with application, the agent will be required to collect the premium at the time of the policy delivery. In this case, the policy does not go into effect until the premium has been collected. The agent may also be required to get a statement of good health from the insured. This statement must be signed by the insured, and verifies that the insured has not suffered injury or illness since the application date. If the full premium was submitted with application and the policy was issued as requested, the policy coverage would generally coincide with the date of application if no medical exam is required. If a medical exam is required, the date of the coverage will coincide with the date of the exam.

Medical Information Bureau (MIB)

In addition to an attending physician's report, the underwriter will usually request a Medical Information Bureau (MIB) report. The MIB is a membership corporation owned by member insurance companies. It is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals. It is a systematic method for companies to compare the information they have collected on a potential insured with information other insurers may have discovered. The MIB can be used only as an aid in helping insureds know what areas of impairment they might need to investigate further. An applicant cannot be refused simply because of some adverse information discovered through MIB.

Risk Classification

In classifying a risk, the Home Office underwriting department will look at the applicant's past medical history, present physical condition, occupation, habits, and morals. If the applicant is acceptable, the underwriter must then determine the risk or rating or rating classification to be used in deciding whether or not the applicant should pay a higher or lower premium. A prospective insured may be rated a s one of the three classifications: standard, substandard, or preferred.

Consumer Reports

Include written and/or oral information regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources.

Part 1 - General Information

Includes general questions about applicant such as name, age, address, birth date, gender, income, marital status, and occupation. It will also inquire about the existing policies and if the proposed insurance will replace them. Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning the beneficiary.

Negative Information on Consumer Reports

Includes information regarding a customer's delinquencies, late payments, insolvency or any other form of default

Preferred Risks

Individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits.

Insurable Interest for Beneficiarys

Insurable interest is not required of beneficiaries. Since the beneficiary's well-being is dependent upon the insured, and the beneficiary's life is not the one being insured, the beneficiary does not have to show an insurable interest for a policy to be purchased.

Aleatory Contract

Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

Replacement

Is a practice of terminating an existing policy or letting it lapse, and obtaining a new one. To make sure that replacement is appropriate and in the best interests of the policy owner, insurance producers and companies must take special underwriting measures to help policyowners make informed decisions.

Contract of Adhesion

Is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. Insurance contracts are offered on a take-it-or-leave-it basis by an insurer. Any ambiguities in the contract will be settled in favor of the insured.

Life and Health Example

John purchases a life insurance policy for $100,000. His monthly premium is $100. If John only had the policy for 2 months, which means he only paid $200 in premiums, and he unexpectedly died, his beneficiary will receive $100,000. A $200 contribution on the part of the insured in exchange for $100,000 benefit from the insurer illustrates an aleatory contract.

Collecting the Initial Premium and Issuing the Receipt

Most agents attempt to collect the initial premium and submit it along with the application to the insurer. In addition, collecting the initial premium at the time of the application increases the chance that the applicant will accept the policy once it is issued. Whenever the agent collects premiums, the agent must issue a premium receipt. The type of receipt issued will determine when coverage will be effective.

Competent Parties

Must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of: - legal age - mentally competent - not under influence of drugs or alcohol.

Willfully violates fair credit reporting act enough to constitute a general pattern or business practice

Penalty up to $2,500

Explaining the Policy and its Provisions, Riders, Exclusions, and Ratings

Personal delivery of the policy allows the agent an opportunity to make sure that the insured understands all aspects of the contract. Review of the contract with the insured involves pointing out provisions or riders that may be different than anticipated, and explaining what effect they have on the contract. In addition, the agent should explain the rating procedure to the client, especially if the policy is rated differently than applied for, or has been modified or amended in any other way. The agent should also explain any other choices and provisions available to the policyowner that may become active at this time.

Standard Risks

Persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Standard risks are representative of the majority of people at their age and with similar lifestyles. They are the average risk.

Buyer's Guide

Provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance. This document explains how a buyer should go about choosing the amount and type of insurance to buy, and how a buyer can save money by comparing the costs of similar policies. Insurers must provide a buyer's guide to all prospective policy applicants prior to accepting their initial premium. If the policy contains an unconditional refund provision of at least 10 days (free-look period), a buyer's guide can be delivered with the policy.

Conditional Receipt

The most common type of receipt, which is used only when the applicant submits a prepaid application. The conditional receipt says that the coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for. This rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages.

Legal Purpose

The purpose of the contract must be legal and not against public policy. To ensure legal purpose of a Life insurance policy, it must have both insurable interest and consent. A contract without a legal purpose is considered void, and cannot be enforced by any party.

Offer and Acceptance

There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant usually makes the offer when submitting the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

Investigative Consumer Report (Inspection)

To supplement the info on the app the underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral inspection. They are general reports of the applicants finances, character, work, hobbies, and habits. Companies that use inspection reports are subject to the rules and regulations outlined in the Fair Credit Reporting Act

Misrepresentations

Untrue statements on the application and could void the contract

Health Insurance Portability and Accountability Act (HIPAA)

a federal law that protects health information. HIPAA regulations provide protection for the privacy of certain individually identifiable health information (such as demographic data that relates to physical or mental health condition, or payment information that can identify the individual), referred to as protected health information. Under the Privacy Rule, patients have the right to view their own medical records, as well as the right to know who has accessed those records over the previous 6 years. The Privacy Rule, however, allows disclosures without individual authorization to public health authorities authorized by law to collect or receive the information for the purpose of preventing or controlling disease, injury, or disability.

Agent/Producer

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

Applicant or proposed insured

a person applying for insurance

Illustration

a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years. A life insurance illustration must do the following: - distinguish between guaranteed and projected amounts - clearly state that an illustration is not a part of the contract - identify those values that are not guaranteed as such An agent may only use the illustrations of the insurer that have been approved, and may not change them in any way.

Insurance Policy

a written contract between the insured and an insurance company that promises to pay the insured or the beneficiary for loss caused by specific events

Policy Summary

a written statement describing the features and elements of the policy being issued. It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider. A policy summary will also include premium, cash value, dividend, surrender value and death benefit figures for specific policy years. The policy summary must be provided when the policy is delivered.

USA PATRIOT Act

also known as the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act. Was enacted on October 26, 2001. The purpose of the Act is to address social, economic, and global initiatives to fight and prevent terrorist activities. The act enabled the Financial Crime Enforcement Network (FinCEN) to require banks, broker-dealers, and other financial institutions to establish new anti-laundering (AML) standards. With new rules in place, FinCEN incorporated the insurance industry into this group.

Substandard (High Exposure) Risk

applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are also referred to as "rated" because they could be issued with the premium rated-up, resulting in a higher premium.

Declined Risks

applicants who are rejected. Risks that the underwriters assess as not insurable are declined. A risk may be declined for one of the following reasons: - there is no insurable interest - the applicant is medically unacceptable - the potential for loss is so great it does not meet the definition of insurance - insurance is prohibited by public policy or is illegal

Prohibited information in consumer reports

bankruptcies more than 10 years old, civil suits, records of arrest or convictions of crimes, or any other negative information that is more than 7 years old

Buyer's Guide VS Policy Summary

buyers guide provides generic information on various types of policies. A policy summary provides specific information on the policy being issued.

Life Insurance

coverage on human lives

The Acceptability of a Risk

determined by checking the individual risk against many factors directly related to the risk's potential for loss. Besides these factors, an underwriter will sometimes request additional information about a particular risk from an outside source. These reports fall into 2 categories: - Consumer Reports - Investigative Consumer Reports Both reports can only be used by someone with a legitimate business purpose, including insurance underwriting, employment screening, and credit transactions.

Lawful life settlement contracts

do not constitute STOLIs. Life settlement transactions result from existing life insurance policies; STOLIs are initiated for the purpose of obtaining a policy that would benefit a person who has no insurable interest in the life of the insured at the time of policy origination.

Under the Fair Credit Reporting Act

if a policy of insurance is declined or modified because of information contained in either a consumer or investigative report, the consumer must be advised and provided with the name and address of the reporting agency. The consumer as the right to know what was in the report. The consumer also has the right to know the identity of anyone who has received a copy of the report during the past year. If the consumer challenges any of the information in the report, the reporting agency is required to reinvestigate and amend the report, if warranted. If a report is found to be inaccurate and is corrected, the agency must send the corrected information to all parties to which they had reported the inaccurate information within the last 2 years.

Sources of Underwriting Information

in order to properly select and classify insurance risks, the insurer needs to obtain the applicant's background information and medical history. There are several sources of underwriting information that are available to the underwriters. - Application - Agent's Report - Investigative Consumer Report (Inspection)

Part 2 - Medical Information

includes information on the prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. If the amount of insurance is relatively small, the agent and the proposed insured will complete all of the medical information. That would be considered a nonmedical application. For larger amounts, the insurer will usually require some sort of medical examination by a professional.

Insurable Interest for Life insurance

insurable interest must exist between the policyowner and the insured at the time of the application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

Fraud

intentional misrepresentation or deceit with the intent to induce a person to part with something of value

Stranger-Originated Life Insurance (STOLI)

is a life insurance arrangement in which a person with no relationship to the insured (a stranger) purchases a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies. In other words, STOLIs are financed and purchased solely with the intent of selling them for life settlements.

Investor-owned life insurance (IOLI)

is another name for a STOLI, where a third-party investor who has no insurable interest in the insured initiates a transaction designed to transfer the policy ownership rights to someone with no insurable interest in the insured and who hopes to make a profit upon the death of the insured or annuitant.

Unknowingly violates the Fair Credit Reporting Act

is liable in the amount equal to the loss to the consumer, as well as any reasonable attorney fees incurred in the process.

Life insurance producer

is the company's field underwriter. As a field underwriter, the agent(or producer) can be considered the most important source of information available to the company underwriters.

Agent

is the company's frontline, and is referred to as a field underwriter because the agent is usually the one who has solicited the potential insured.

HIV test

it is common among insurers to require an HIV test when an applicant is applying for a large amount of coverage, or for any increased and additional benefits. To ensure proper obtaining and handling of results, and to protect the insured's privacy, states have enacted the following laws and regulations for insurers requiring an applicant to submit to an HIV test: - the insurer must disclose the use of testing to the applicant, and obtain written consent from the applicant on the approved form - the insurer must establish written policies and procedures for the internal dissemination of test results among its producers and employees to ensure confidentiality

Agent application responsibilities

it is the agent's responsibility to make certain that the application is filled out completely, correctly, and to the best of the applicant's knowledge. The agent must probe beyond the stated questions in the application if he or she has any reason to believe the applicant is misrepresenting or concealing information, or does not understand the specific questions asked. Any information that is misleading, inaccurate or illegible may delay the issuance of the policy. If the agent feels that there could be some misrepresentation, he/she must inform the insurance company. Some insurers require that the applicant complete the application under the agent's watchful eye, while other insurers require that the agent complete the application in order to help avoid mistakes and unanswered questions.

Premium Determination 3 key factors for life insurance

mortality, interest, and expense

Delivering the Policy

once the underwriting process has been completed and the company issues the policy, the agent will deliver it to the insured. Although personal delivery of the insurance policy is the best method of finalizing the insurance transaction, mailing the policy directly to the policyowner is acceptable. When the insurer relinquishes control of the policy by mailing it to the policyowner, policy is considered legally delivered. However, it is advisable to obtain a signed delivery receipt.

Unilateral Contract

only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. But, an insurer is legally bound to pay losses covered by a policy in force.

Underwriting

the risk selection process. The underwriter's responsibilities include selecting only those risks that are considered insurable and meet the insurer's underwriting standards. The purpose of underwriting is to protect the insurer against adverse selection (risks which are more likely to suffer a loss).

Lapse

policy termination due to nonpayment of premium

Agent(producer) Report

provides the agent's personal observations concerning the proposed insured. The insurer may inquire whether the agent knows of any adverse information about the applicant, or ask the agent to express an opinion about the applicant's character, financial standing, and environment. The agent's report does not become part of the entire contract, although it is part of the application process.

SAR Reports

relevant SAR reports must be filed with FinCEN within 30 days of initial discovery. Reporting takes place on FinCEN Form 108

Death Benefit

the amount paid upon the death of the insured in a life insurance policy

Conditional Receipt

the applicant may be covered as early as the date of the application

Completing the Application

the application is the starting point and basic source of information used by the company in the risk selection process. Although applications are not uniform and may very from one insurer to another, they all have the same basic components: Part 1 - General Information and Part 2: Medical Information

Mode

the frequently premium is paid, the higher the premium

Application

the person applying for the insurance must submit an application to the insurer for approval for a policy to be issued. The application is one of the main sources of underwriting information for the company. *application is the key source underwriters use for information about the applicant*

STOLI

they violate the principle of insurable interest, which is in place to ensure that a person purchasing a life insurance policy is actually interested in the longevity rather than the death of the insured. Because of this, insurers take an aggressive legal stance against policies they suspect are involved in STOLI origination.

Anti-Money Laundering (AML) program

to secure the goals of the Act, FinCEN implemented an AML Program that requires the monitoring of all financial transactions and reporting of any suspicious activity to the government, along with prohibiting correspondent accounts with foreign shell banks. A comprehensive customer identification and verification procedure is also to be set in place. The AML program consists of the following minimum requirements: - Assimilate policies, procedures and internal controls based on an in-house risk assessment including: - instituting AML programs similar to banks and securities lenders - file suspicious activity reports (SAR) with Federal authorities - appointing a qualified compliance officer responsible for administering the AML program - continual training for applicable employees, producers and other - allow for independent testing of the program on a regular basis

Insurance

transfer of risk of loss

Disclosure Authorization Notice

when insurers plan to seek and use information from investigators, they must first provide the applicant/insured with a written Disclosure Authorization Notice. It will state the insurer's practice regarding collection and use of personal information. The disclosure authorization form must be written in plain language, and must be approved by the head of the Department of Insurance.

Medical Examinations

when required by the insurance company, are conducted by physicians or paramedics at the insurance company's expense. Usually such exams are not required with regard to health insurance, thus stressing the importance of the agent in recording medical information on the application. The medical exam requirement is more common with life insurance underwriting. If an insurer requests a medical examination, the insurer is responsible for the costs of the exam.