Life Insurance: Completing the Application, Underwriting, and Delivering the Policy (12 Questions)

Speculative risk

one with which you can lose or you can win. The best example for speculative risk is gambling.

Preferred Risks

people who will have lower rates for insurance because they pose less risk to an insurance company. non smokers, healthy people with normal life expectancies.

Medical Information (parts of insurance app)

questions regarding medical history of proposed insured.

Representation

A statement, which is true to the best of the applicant's knowledge and belief. (for test purposes all statements made on an insurance application are representations, NOT warranties).

Parts of the Life Insurance Application

GMA - Gold Makes Awards I. General Information II. Medical Information III. Agent's Statement

Disclosures at Point of Sale

HIPPA Disclosure HIV Consent

Test Clue ... If there is not insurable interest....

No policy will be issued.

Risk Avoidance

One method of coping with risk is to try and avoid it. perhaps spending the rest of your life in a bubble...

Managing risks:

Risk Avoidance Assumption or Retention of Risk Risk Transfer Risk Sharing Risk Reduction or Prevention

Financial versus Nonfinancial Risks

Risks can be financial risks in the sense they involve financial loss or can be nonfinancial such as emotional distress or loss of memory as examples.

Types of Risks

Speculative risk Pure Risk Financial vs. Nonfinancial Risk Personal, Property and Liability Risks

HIV Consent

The National Policy on Testing for HIV says that people can only be tested for HIV with their informed consent. This type of disclosure must be given to a life and health insurance policy applicant.

Completing the Application

The agent must fill out the application neatly, honestly, and fairly, and check to make sure all signatures are complete. The agent doesn't have the authority to issue a life insurance policy, only the company does. THE AGENT CANNOT BIND (COMMIT THE INSURANCE COMPANY) a life contract for the company like a property and casualty producer can for auto insurance. The application must be complete and if any information is left out the underwriters will return the application or conduct additional investigations.

Investor Originated Life Insurance (OLI)

Used synonymously with STOLI -consumers must be aware that STOLI arrangements do not resemble traditional life insurance transactions. traditionally the consumer (the insured) initiates the application for insurance and the insured's loved ones are beneficiaries of the death benefits. In a STOLI arrangement, an investor group - strangers-- initiate the insured's application and will likely acquire an interest in the life and possibly profit from death of a participant. Insurance companies may refuse to pay benefits on STOLI arrangements.

Twisting

When a policy owner is induced to discontinue and replace a policy through agent or insurer distortion or misrepresentation of facts. -illegal

Which insurance companies are covered by USA Patriot act/ anti-money laundering?

insurance companies engaged within the United States in the business of issuing or underwriting "covered products," which are those insurance products FinCEN believe have features such as cash surrender values that pose money laundering and terrorist financing risks. covered products include: +permanent life insurance policies, other than group life policies +annuity contracts, other than group annuity contracts +other insurance products with features of cash value or investment +covered products which do not include reinsurance, group life insurance or group annuities. --Term life, including credit life, property and casualty, health and other kinds of insurance that do not have cash value or investment features also are NOT covered products.

Pure Risk

opposite to speculative risk: A category of risk in which loss is the only possible outcome; there is no beneficial result. Pure risk is related to events that are beyond the risk-taker's control and, therefore, a person cannot consciously take on pure risk. This risk is what insurance is all about. It covers only losses and does not imply that the insured can "make money" after a covered loss. The goal of insurance is to place the insured back to her financial position just prior to the loss. Obviously, with the life insurance you can't replace the deceased, but instead will help provide financial stability to the family or loved ones and replace the loss of the deceased financial support.

Risk Sharing

transfer most of the risk but not all to an insurance co. you may have to share part of the losses.

Warranties and Reprsentations

when the application for the insurance contract is made a part of the policy, the answers to specific questions on the application may be deemed to be warranties. If false, they make the policy voidable b. y the insurer regardless of their materiality.

The policy effective date is important because the policy provides protection as of that date. Whichever date is used also establishes the following dates:

- the contestable period begins on this date -the suicide clause period begins on this date -the insurance coverage beings on this date

Misc. Agent Responsibilites

-collecting of premiums -submitting the life application to home office -check for all required signatures -fill out and sign the agent's section of the application -agent must stress the importance of answering all questions accurately.

THE PURPOSE OF UNDERWRITING (TEST QUESTIONS)

To avoid adverse selection

General Information (parts of insurance app)

asks personal questions such as full name of insured, address, date of birth, etc.

Risk Classification (Ratings used by Insurers)

Used when a person doesn't have a normal life expectancy. Once the rate for policy is established, the company can never raise it as long as each premium is paid before the expiration of the grace period.

Incomplete Application

incomplete applications that are accepted mean that the company has made a decision on assuming a given risk that could result in a significant loss for the co. Should be rescinded or cancelled before incontestable clause takes effect.

Replacement

It is not uncommon to find life insurance purchasing decisions that involve the replacement of an old policy with a new one. An existing insurance policy may be replaced by another policy from the same insurer or by a different insurer.

Required signatures

It is the agent's responsibility to check the application for all required signatures. without these signatures the underwriting department will return the "incomplete" application to the insurance agent who will then have to revisit with the client to get the appropriate required signatures. without the required signatures the application cannot be considered and the conditional receipt (discussed later) may not have any legal standing.

Misrepresentation

a false statement made by the insured such as indicating that he/she doesn't smoke when in fact the proposed insured smokes three packs a day. an untrue answer supplied on the application.

Agent's Statement (parts of insurance app)

agents are required to furnish certain information and to answer specific questions about the proposed insured such as: -length of time the proposed insured has known the agent -knowledge of current insurance in effect -whether proposed insurance will be a replacement -knowledge of personal habits of proposed insured --the agent will have to sign the statement attesting that all facts are true, and the underwriters will review this section.

Assumption or Retention of Risk

instead of purchasing insurance, you decide to assume the risk by self-insuring. An example of this would be declining life or health insurance and preparing yourself and your family for paying all expenses out of your hard earned money.

Insurers covered by USA Patriot act/ anti-money laundering rules must...

take responsibility for their agents' and brokers' actions and secure compliance by them.

Policy Effective Date (coverage begins)

the policy effective date can be: -date of the conditional receipt (if premium is paid and underwriters approve issuance of policy) or -date of a paramedic exam (if conditional receipt is given and medical exam is requested) or -date policy is delivered and premium paid. (premium not paid and conditional receipt not issued).

Personal, Property and Liability Risks

the pure risks confronting individuals and businesses are ordinarily divided into three categories. 1. risks involving the person 2. risks involving loss of or damage to property 3. risks that involve liability for injury or damage to persons or the property of others.

Substandard Risk

Also known as special class risk - a person does not have a normal life expectancy and therefore, exposes the co. to more risk. as a result, they will likely be charged more for insurance. *premiums will be adjusted to insure the additional risk **permanent extra premiums are charged by the insurance co. ***higher premium based on a percentage above standard rates

The main characteristic of STOLI arrangements is that ...

The insurance is purchased purely as an investment vehicle, not to provide for the insured's beneficiaries. typically marketed to people 65 - 85 years old

Administration of the Fair Credit Reporting Act

The life agent must administer the Fair Credit Reporting Act found in the back of the policy application. The agent must explain the terms and have the proposed insured sign them. These signed forms will give the underwriters authority to investigate the proposed insured further if they deem it necessary, including obtaining credit reports.

Risk Transfer

This choice is what insurance is all about and is the most common way to manage risk. Transfer the risk to the insurance company and have the insurance company pay for any losses.

Difference between warranty and representation

a warranty is a part of the contract itself and must therefore be strictly complied with. Representations are usually incidental statements preceding the contract.

Types of agents

Independent Agents: contract with several insurance companies Captive agents: can represent one insurance company general agent: individual responsible for insurance agency operation in a particular area, including the sale of life and health insurance, servicing policies already sold, recruiting and training agents, and providing administrative support. General agents are compensated on a commission basis and usually pay all expenses of administering their agencies.

What does the AML Program Require?

(1) Insurance companies must develop and implement AML programs reasonably designed to prevent the companies from being used to facilitate money laundering or financing terrorist activities. (2) The AML program must be in writing, approved by senior management and at a minimum must: -incorporate policies, procedures and internal controls based on an internal risk assessment -designate a competent compliance officer responsible for administering the AML program -Provide ongoing training -provide independent testing of the program on a periodic basis (3) Take reasonable steps to identify those aspects of their operations that may be vulnerable to money laundering and should use such assessments to develop and implement their AML programs . (4) Integrate agents and brokers in AML programs, for obtaining customer info. from agents and brokers and for using it to assess risks and identify money laundering red flags. (5) Can train employees directly or verify that they have been trained by another company or third party. (6) Required to REPORT transactions involving $5,000 or more if the firm knows, suspects or has reason to suspect that a transaction : -involves funds derived illegally or is intended to hide illegal funds. -is designed to evade other reporting requirements -has not business or lawful purpose -involves the use of the insurance company to facilitate criminal activity

Underwriters also review the following:

+Law of large numbers: actuaries look at similar type losses using large numbers of incidents (for test purposes remember the word homogenous, which defines this process) with a large enough pool of risks, an insurer can predict with reasonable accuracy the number of claims it will have. +the loss must be accidental and not with the intent of creating a situation just to collect the insurance proceeds +the loss must be significant when compared to the initial cost of the policy. +The loss must be measurable and due to chance outside the control of the insured +The loss must be caused by a non-catastrophic cause, meaning that these situations are eliminated from policy coverage: insured persons in the national guard while in a war zone or a foreign country police action... +insurable interest must exist in the insured at the time of application. +Medical and prior application info provided by MIB. Medical Information Bureau. Non profit trade association that provides medical history to insurance companies. +character and credit rating reports. KNOWN AS INSPECTION REPORTS +Medical and paramedic exams. The insurance co. will typically pay the costs of all of these. +Attending Physician Statement (APS) may be required +Individual underwriting is NOT done for group policies +Evidence of insurability is NOT required for annuities as annuities are not insurance.

More on insurable interest:

- all persons are assumed to have an insurable interest in themselves. therefore one can own all the insurance they want (subject to their health and ability to pay) having an insurable interest does NOT guarantee issuance of the policy. -if the insured/owner later on assigns his rights in the policy, the person designated as the new "owner" must, in most cases, have an insurable interest in the insured. >>>>>>>>>>>>>>>Simply put, any policy owner must stand to have a financial loss due to the death of the insured

USA Patriot Act/Anti-Money Laundering

-Establish AML programs similar to those required at banks and securities broker dealers (the AML program rule). -File suspicious activity reports (SARs) with the federal government (the SAR rule) -FinCEN, or its designee, will examine insurance company compliance with these rules.

Without all the required signature the following would be assumed:

-the proposed insured has not given permission to the underwriters to conduct any background, investigations, or medical inquiries. -the proposed insured has not attested to the information in the application.

There are other specific disclosures that must be made to potential insurance policy applicants. Specific rules are reviewed in the general law sections. Consumers have the right to become aware of necessary disclosures so that they can have all the information necessary to make a rational decision regarding the purchase of an insurance policy.

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Delivering the Policy (steps)

1. Check the policy before delivery 2. Make a definite appointment with the insured 3. review and explain policy to the owner, pointing out different parts including the summary page, provisions, exclusions and riders. also impt. that the producer explain and define anything that is not easily understandable. 4. Explain that the policy begins when issued. If a client paid the premium in advance and was issued a conditional receipt, the policy (if issued) will reflect the original application date (date of conditional receipt) not the delivery date. 5. If the policy was issued on a different basis than what the app called for, such as a substandard risk, then explain the rating to the proposed insured and also explain why and what the policy owner's options are.

Some issues in policy replacement:

1. pay high first year expenses again 2. higher premiums 3. new suicide clause 4. new incontestable clause 5. more or less favorable policy terms? ****When an agent submits an application for life insurance or an annuity to his insurer, he must include a statement about whether or not the policy is a replacement. If it is, the agent must give the applicant a prescribed notice alerting them to the need to compare the existing and the proposed benefits carefully and to seek information from the agent or insurer from whom he or she purchased the original policy.

Conditional Receipt Rule (explained)

A conditional receipt is issued by the life agent at the time of application of the proposed insured provided the initial required premium is paid. T The conditional receipt will allow a death benefit to be paid if the insured dies within the underwriting period, prior to the issuance of the policy. However, this does not guarantee the issuance of the policy or benefit payment. The underwriters are still going to conduct the regular underwriting procedures. If the policy would not have been issued there will be no death benefit paid.

Insurance Agents

Act in a fiduciary capacity when dealing with the public. they must always use utmost care in dealing with clients and client transactions. Will be held to a higher duty of care than an average person.

Stranger Originated Life Insurance (STOLI)

An arrangement in which a stranger initiates an insurance policy against someone's life and makes the premium payments. -come into conflict with some states' laws covering insurable interest. even in states where stoli is technically legal, the intent behind the insurable law requires that anyone holding a policy on another have a stake in that person's well being and health, as opposed to their death. ^however, STOLIs work in the opposite manner. there is no payout for the STOLI investor until the insured dies. the potential conflict of interest can be again a breeding ground for fraud or worse. -like the fraudulent mortgage, sometimes a broker will misrepresent the assets of the person he is seeking to insure in order to earn a large commission on the unnecessarily large policy that will be sold to investors. The insured often has no idea this is the case, and is encouraged to focus on the relatively small cash payment he will receive for purchasing the policy and providing some documentation to the insurance company.

Insurable Interest

In order to own a life insurance policy, one must have what is known as "an insurable interest" in the insured. This means that the owner of the life insurance policy must stand to lose something by the death of the insured. Underwriters will review each application to ensure this relationship exists before the issuance of the policy. NOTE for life insurance, an insurable interest must exist at the time of application.

HIPPA Discolsure

Insurance companies are required to provide a HIPPA disclosure to applicants advising them that the insurer collects, uses and discloses information about them in order to evaluate and process any requests for coverage and claim benefits.

Insurance Company Ratings

Measures the insurance company's ability to pay claims AM BEST COMPANY: A++ is the highest rating STANDARD AND POOR as well as MOODY'S: AAA is the highest rating.

You must for the exam, know all of the following conditional receipt rules and be able to apply them to a factual situation, which the examiners will give you on the exam:

Rule #1: When premium is paid and a conditional receipt is given, and the underwriters approve the issuance of the policy, the policy effective date will be the date of the conditional receipt. Rule #2: When a conditional receipt is given and a medical exam is requested by the underwriters, the effective date of the policy, if issues, will be the date of the medical exam, not the date of the conditional receipt. Rule #3: If no premium is paid and a conditional receipt is not given to the proposed insured, the policy effective date will be the date the underwriter approves and issued the policy. The coverage will then go into effect when the policy is delivered and premium is paid.

Underwriting Process

The proposed insured's app will be reviewed by the insurance company underwriter to determine whether or not there is an insurable risk, whether there is an insurable interest in the insured ( if the owner is a different person) and whether the proposed insured is insurable. The underwriters try to pool similar pure and acceptable risks to ultimately help reduce the insurer's risk and AVOID ADVERSE SELECTION

Changing an Application

changes made during the initial prep must be initialed by proposed insured. any further changes after issuance must have the insured's written approval. if the company discovers an error or omission the application is usually returned to the agent who must go to the proposed insured to make the change and have it initialed. NOTE: the original application becomes part of the policy (contract) when it is issued. Also, if an attending physician's statement is requested by the underwriters, or a paramedic exam was given, these statements also become part of the policy.

Risk Reduction or Prevention

one example of risk reduction is by living a healthier lifestyle or by living and working under safer conditions.

Warranties

if false make a policy voidable