Life Insurance Chapter 1: Completing the app, underwriting, and delivering the policy

contract of adhesion

prepared by one of the parties (insurer) and accepted/rejected by the other party (insured) insurance contracts are offered on a take it or leave it basis by insurer, not drawn up through negotiations

Which of the following documents delivered to the policy owner includes information about premium amounts, cash values, surrender values and death benefits for specific policy years?

A policy summary -must be delivered along with a new policy

The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective?

As of the application date

When must insurers provide a buyers guide?

Prior to accepting the initial premium

When must the policy summary be provided?

The policy summary must be provided when the policy is delivered

Stranger-originated life insurance (STOLI)

a life insurance arrangement in which a person with no relationship to the insured (a stranger) purchases a life insurance policy on the insured with the intent of selling the policy to an investor and profiting financially when the insured dies. violates the principle of insurable interest also known as investor-owned life insurance

warranty

an absolutely true statement upon which the validity of an insurance policy depends statements by applicants are not normally considered warranties

in insurance, an offer is usually made when:

an applicant submits an application to the insurer

declined risks and why may they be rejected

applicants who are rejected. -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 illegal

conditional contract

certain conditions must be met by the policy owner and the company in order for the contract to be executed

Contracts that are prepared by one party and submitted to the other party on a take it or leave it basis are classified as

contracts of adhesion

substandard risk

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

alien insurer

if the insurer is incorporated outside of the United States

foreign insurer

if the insurer is operating in a state other than the one they are incorporated in

domestic insurer

in the state they're incorporated

consideration

one element of a legal contract something of value that each party gives to the other

offer and acceptance

one element of a legal contract there must be a definitive offer by one party, and the other party must accept this offer in exact terms

unilateral contracts

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

What are the general components of an application

part 1 general info and part 2 medical

An individual applied for an insurance policy and paid the initial premium. The insurer issued a conditional receipt. Five days later the applicant had to submit to medical exam. If the policy is issued, what would be the policy's effective date?

The date of the medical exam

In forming an insurance contract, when does acceptance usually occur?

When an insurer's underwriter approves coverage

When is the earliest a policy may go into effect?

When the application is signed and a check is given to the agent

Illustration

a presentation or depiction that includes non guaranteed elements of a policy of individual or group life insurance over a period of years. an agent may only use the illustrations of the insurer that have been approved, and may not change them in any way

Policy owner

the person entitled to exercise the rights and privileges in the policy

If a policy includes a free-look period of at least ten days, the Buyers Guide may be delivered to the applicant:

with the policy. -if its not delivered then, the buyers guide MSU be delivered prior to accepting the initial premium

principle of insurable interest

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 insurers take an aggressive stance against STOLI transactions because of this

preferred risk

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

to ensure legal purpose of a life insurance policy it must have...

insurable interest and consent

The insurer discovered that one of the applicants for life insurance missed a couple of questions on the application. What should the insurer do with the application.

return to the applicant for completion

Which of the following best details the underwriting process for life insurance?

selection, classification, and rating of risks

representations

statements believed to be true to the best of ones knowledge answers given by the insured on an insurance application

What is included in a policy summary?

the producers name and address, the insurance company home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years

misrepresentation

untrue statements on the application, could void the contract

acceptance takes place when...

when an insurers underwriter approves the application and issues a policy

prohibited information

-consumer reports cannot obtain this information if in connection with a life insurance policy this includes: bankruptcies more than 10 years old, civil suits, records of arrest or convictions or other negative information more than 7 years old

material misrepresentation

a statement, that if discovered, would alter the underwriting decision of the insurance company if material misrepresentations are intentional they're considered fraud

elements of a legal contract

agreement (offer and acceptance), consideration, competent parties, and legal purpose

A life insurance illustration must do the following:

-distinguish between guaranteed and projected amounts -clearly state that an illustration is not part of the contract, and -identify those values that no guaranteed as such

dividends

-generated when the premiums and the earnings combined exceed the actual costs of providing coverage -not guaranteed -in participating policies, policy owners are entitled to dividends

the primary criteria an underwriter will use to access the desirability of a particular candidate are:

-health (current and past), occupation, lifestyle, and hobbies or habits

mutual companies

-owned by policy owners and issue participating policies

legal purpose

contract must be legal and not against public policy legal purpose of a life insurance policy must have insurable interest and consent

underwriting

def: the risk selection process -underwriters goal is to protect the insurer from adverse selection

aleatory contracts

insurance contracts are aleatory, which means there is an exchange of unequal amounts of values

adverse selection

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

What is the MIB?

it is a nonprofit organization that maintains underwriting information on applicants for health and life insurance

insured

person covered by the insurance policy, may or may not be the policy owner

Standard risk

persons who are entitled to insurance protection without extra rating or special restrictions. Average risk, and represent the majority of people

rated

policies that could be issued with the premium rate up, resulting in a higher premium -substandard risk policies are referred to as rated

What describes the specific information about a policy?

policy summary

conditional receipt

-used only when the applicant submits a prepaid application -coverage will be effective either on the date of the application or the date of the medical examination, whichever occurs last, as long as the applicant is found to be insurable at a standard risk

buyers 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 costs of similar policies.

insurable interest must exist when:

-at the time of the application -after a life insurance policy has been issued it does not matter if insurable interest exists (only at the time of the application) -not required of beneficiaries

negative information

-customers delinquencies, late payments, insolvency or any other form of default -not allowed to include in a consumer report if more than 7 years old

Certificate of Authority

-insurers must apply for and be granted this in order to transact business in a specific state -must also meet financial requirements set by the state

participating policies

-policy owners are entitled to dividends -in the case of mutual companies are a return of excess of premiums and are therefore nontaxable

nonparticipating policies

-policy owners do not share in profits or losses -generally issued by stock companies -does not pay dividends to policy owners, however, taxable dividends are paid to stockholders

disclosure statement

-provides basic information about the costs and coverage of the insurance being solicited -must be given to applicant no later than the time the application for insurance is signed

two types of medical examinations

1: paramedical report-completed by a paramedic or nurse 2: attending physicians statement (APS)-from a medical practitioner who treated the applicant for a prior medical problem -may require both -for policies with higher amounts of coverage or concerns about insured's health -conducted at insurers expense -common to require HIV test for higher coverage

lapse

policy termination due to nonpayment of premium