AD Banker Life & Health Chapter 2

Underwriting Process

*Insurability is determined *MIB report may be requested *Classification of risk and rating

Replacement does not apply to:

Credit life insurance Group life insurance or annuities Conversion of an existing policy Proposed life insurance that is to replace life insurance issued by the same insurer

Which of the following is a policy not issued with a rating?

Preferred Rate

Permanent

Premium higher than term when other factors equal, protection continues to age 100 or until surrendered, and provides cash accumulation

If a replacement is involved, the replacing agent must:

*Present to the applicant at the time of application a Notice Regarding Replacement which must be signed by both the agent and the applicant *Collect and provide a list of life insurance policies or annuities to be replaced along with the names of the insurers and contract numbers *Leave with the applicant the originals or copies of all written or printed communication used for presentation—including sales proposals and comparisons of policies

Policy Delivery

*Statement of Good Health *Producer explains rating, premiums, coverages, and policy benefits *Constructive delivery

The mortality rate is based on mortality tables which show life expectancy and the death rate per _______ people living in the U.S.

1,000

Participating Life Insurance

A class of policy marketed by a mutually owned company. The word participating means a dividend may be paid to the policyowner when it is declared by the board of directors. The company is not required to issue only participating policies, but only participating policies will be eligible for dividends. Participating policy dividends are treated as a refund of premium for tax purposes initially. However, once all premiums have been recovered, any further dividends are taxable.

Flat Rate

A flat additional premium may be assessed on a temporary (1 to 5 years) or permanent basis.

Third-Party Ownership

A policy owned by a person other than the insured.

Tabular Rate

A surcharge is calculated by adding 25% of the base rate to the standard premium for each "Table" number based on the condition causing the substandard rating. There are 10 standard tables used.

Trial Application

A trial application is one submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid.

Pre-need Plan

A type of coverage with a small face amount ($50,000 or less), typically purchased to pay the burial expenses of the insured.

Viatical /Life Settlements

An individual selling an owned insurance policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available.

Group Life Insurance

An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors, or members. Group insurance generally provides protection for an employee's named beneficiary, typically a spouse if married. The coverage may be changed only in the Master policy. The coverage is normally written on a renewable term basis providing no cash value or living benefits as found in individual cash value policies. The amount of coverage can be limited to a fixed dollar amount such as $50,000 or a multiple of earnings (for example, 2 times annual salary). Some group plans allow for the purchase of additional coverage which may be partially or fully underwritten. Upon retirement, group coverage can be converted to an individual permanent life insurance plan without having to prove insurability.

Which of these modes would result in the insured paying the least amount per year for life insurance?

Annual

Existing Coverage

Any insurance policies already covering the proposed insured.

Replacement

Any transaction in which new life insurance or an annuity is to be purchased and it is known that the existing contract will be: Lapsed, forfeited, surrendered, or terminated Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values Amended to reduce the benefit or term in which the coverage would remain in force Reissued with a reduction in cash value Pledged as collateral or subjected to borrowing for amounts in the aggregate exceeding 25% of the loan value set forth in the policy

A business owner buys a life policy on his own life. He/she may be all of the following, EXCEPT _________.

Beneficiary

All of the following are things a producer should do when meeting with the client after the policy has been issued, except:

Disclose the amount of commission earned on the sale

Which of the following statements correctly describes the difference between gross premium and net premium?

Gross premium is the total amount paid for the policy. Net premium does not include the insurance company's cost of doing business, such as paying claims and other expenses

Liquidity

Immediate funds available upon death to pay creditors, taxes and final expenses, as well as cash values available for policy loans, withdrawals, and full surrenders.

Personal

Includes name, address, driver's license number, Social Security number, income, employment, tobacco use, number of dependents, etc

Individual Life Insurance

Individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill. Unlike group insurance, which usually terminate upon separation of service or the employer choosing to discontinue the plan, individually owned policies leave the decision of continuing the policy to the policyowner.

Standard Risks

Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in this category have an average life expectancy.

A STOLI transaction is best defined as which of the following?

Inducing insureds who do not need and cannot afford life insurance to buy a policy and sell it for cash

What is an insurer permitted to do if and when it discovers during the underwriting process that a proposed insured has AIDS?

Insurers may refuse to issue a policy to individuals based on positive HIV test results

Individual

Issued by mutual insurers; dividends considered return of excess premium

Cash Accumulation

Life insurance other than term may develop cash value over time, which may later be borrowed or withdrawn prior to the death of the insured.

Estate Creation

Life insurance proceeds provide financial assets to create an immediate estate the insured can pass on to survivors.

A generic brochure was developed by the ________ to assist prospective buyers of life insurance, which includes descriptions of all the basic types of life insurance and comparisons of their relative costs.

NAIC

Earned vs. Unearned Premium

Premiums are earned for each day the policy is in force. Premiums paid in advance are considered unearned premiums until coverage has been provided, and the insurer has "earned" the right to retain the premium.

A generic brochure was developed by the ________ to assist prospective buyers of life insurance, which includes descriptions of all the basic types of life insurance and comparisons of their relative costs.

Receiving raises and bonuses by the insured over the years

The needs analysis approach in determining the amount of coverage someone needs takes into consideration all of the following, except:

Receiving raises and bonuses by the insured over the years

The requirements for the replacement of life insurance and annuities contracts have been established to:

Regulate the activities of agents and insurers: Protect the interests of life insurance and annuity purchasers from the loss of benefits Assure that the purchaser receives enough information to make an informed decision Reduce the opportunity for misrepresentation Establish penalties for failure to comply with the rules of replacement

Stranger Originated Life Insurance (STOLI)

STOLI transactions occur when a person with no insurable interest in the life of another induces that person to purchase a life insurance policy with the sole intent of becoming the beneficiary and profiting upon the death of the insured. The insured assigns the policy ownership to the investor and receives a payment for an amount less than the death benefit but greater than the policy's cash value. Essentially, the insured is "selling" his/her mortality.

A completed application and a check were submitted by a producer to an insurer on behalf of the applicant. A conditional receipt was given. The insured died prior to the insurer issuing the policy, however the check was no good. What is the result?

Since the check did not clear the bank there is no coverage

Which of the following is not true about life insurance applications?

The application is confidential communication between the agent and the insurer

The human life value approach in determining the amount of life insurance someone needs takes into consideration all of the following, except:

The number of cars the insured and family members own

Product

The policy, riders, and options for which application is being made

Insurable Interest

The relationship that must exist between the applicant and insured, at the time of application and policy issuance, in order for the contract to be valid. An individual has an insurable interest in his or her own self. Insurable interest also exists if a financial or economic loss by the owner results in the event that the insured dies. Examples of insurable interest include a policy taken out on a family member, business partner, or debtor of the policyowner.

Charities

To help fund favorite charitable organizations upon the insured's death, new or existing policies may be donated to charities.

Business Coverage

Used only if the policy is being purchased for business uses.

Beneficiary

Who will receive the benefit and the payout order (primary vs. contingent).

Notice regarding replacement

*A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction *A signed statement as to whether or not the agent knows if replacement is involved

Completing the Application

*Conditional receipt may be issued *Required signatures *Formal request for the insurer to issue a policy

When calculating premium rates, life insurers assume that all:

*Premiums are paid annually in advance of the period of coverage *Premiums will be invested and earn interest *Claims will be paid on the last day of the year

Interest

Interest earnings are also used in calculating premium. Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. Interest earnings reduce the amount of premium needed to fund the future liability of the policy death benefit.

Participating

Issued by mutual insurers; dividends considered return of excess premium

Non-Participating

Issued by stock insurers and do not pay policy dividends

Which of the following would be considered a good result from an underwriter's action when an individual Life Insurance Policy is issued as applied for?

Issued standard

n applicant submits the initial premium at the time of application and is provided a conditional receipt requiring a medical exam to determine insurability. The applicant is killed in a car accident before the medical exam can be performed. Which of the following statements regarding coverage is correct:

There is no coverage

At the time of a life insurance policy delivery, a producer must provide which of the following?

A copy of the illustration that matches the policy for which it was approved

Graded (Lien) Plan

A graded death benefit usually provides 50% of the face amount to start and increases to the full face amount over 1-2 years. The substandard premium does not change. This is generally used with senior life insurance plans to provide minimal benefits without a medical examination.

Permanent Whole Life

A life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term policy at issuance when the amount of coverage and underwriting factors are equal. This policy provides for living benefits for the policyowner or insured by way of its cash values. It also has many options available to the policyowner.

Applicant

A person applying to be insured under an insurance contract. The applicant, owner, and insured may be the same or up to three different persons.

Nonparticipating Life Insurance

A policy marketed by a stock insurer. A stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to a policy dividend. Stock dividends are treated as ordinary income for tax purposes. A policyholder does not have to be a stockholder.

Variable Life Insurance

A policy that uses a separate account for the cash value accumulation. The separate account includes subaccounts which are similar in nature to mutual funds, and a securities and life insurance license are required to sell this policy. The policyowner takes on the investment risk of the policy. The policy's overall death benefit can increase along with the cash values with positive investment performance coming from the separate accounts selected; however, there is no guarantee of return and down markets can cause significant loss of policy value.

Application

A written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the primary source of information used for underwriting purposes.

Gross Premium

Additional charges (loading) are added to the net premium rate to enable an insurer to meet all costs under the contract, such as operating expenses, commissions, medical examination costs, etc.

Required Signatures

Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor, a guardian must sign the application.

Limited Temporary Life Insurance Eligibility

Determines if the proposed insured is eligible for coverage until the policy is issued. If not, no policy will be issued and any payment made will be refunded.

Ownership

Establishes who will actually own the policy and be responsible for paying the premiums.

Net Premium

Excludes the expense component and takes into account interest and mortality factors only. The process of calculating this rate requires: The age and sex/gender of the insured and the benefits to be provided The mortality rate to be used and the rate of interest assumed

Premium

How premiums will be paid (direct bill, electronic transfer, etc.) and how often they will be paid (annually, quarterly, etc.)

Substandard Risks (Higher Risk Exposure)

Individuals who are not acceptable at standard rates because of poor health, bad habits, or occupational hazards. Individuals in this category are issued "rated policies" as follows:

Preferred Risks

Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height and weight. Individuals in this category have a longer than average life expectancy.

Nonmedical Questions

Information regarding foreign travel, high risk occupations, and hazardous hobbies. It also determines if the applicant has already applied for coverage, been rejected for coverage, or applied for bankruptcy.

Effective Date

Insured's age at any point in time typically used at renewal or conversion.

Issue (Original) Age

Insured's age on the policy issue date.

Group Selection Criteria

It is important to compare the selection criteria for individual vs. group insurance. Group insurance is issued based on the characteristics of the group as a whole instead of each individual. Having one uninsurable individual in the group will not cause a declination. Group insurance underwriting will be discussed in greater detail in an upcoming chapter.

Term Life Insurance

Lowest of initial premium outlay and designed for someone with a large insurance need, but with limited cash flow. This coverage is often referred to as temporary, as it is usually written to cover a short time period. This policy does not build cash values and the benefit will remain level, increase, or decrease depending on the type of policy. It is typically used to cover mortgages, short term obligations, or for younger couples.

Term

Lowest premium outlay, temporary coverage for short term need , no cash value, and the benefit can be level, increasing, or decreasing

Group

Master policy issued to plan sponsor and typically written as annual renewable term

Mortality Cost is figured using the following formula:

Mortality Cost - Interest (investment return) = Net Premium (pure rate) Net Premium (pure rate) + Loading (insurer expenses) = Gross Premium

Mortality

Mortality Tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a Mortality Table, a life insurer can determine the average life expectancy for each age group, based on the year of birth. The mortality rate is taken from the Mortality Table that shows life expectancy and the death rate per 1,000 people living in the United States. This table allows the insurer to rate policies using the law of large numbers, so accurate mortality predictions are extremely important. The higher the age group, the higher the mortality rate—translating to a higher premium. The Mortality Table also show that males have a higher mortality rate than females. Based on this statistic, males will pay a higher rate than females.

Beneficiary

One or more "parties" named in the policy to receive the policy's benefits if the insured dies while the contract is in force. The beneficiary cannot be the insured, but can be the owner/applicant.

The Application consists of two parts:

Part 1 contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance. Part 2 contains questions pertaining to medical background, past and present health, any medical visits, medications, height/weight, hospitalizations/surgeries in recent years, and the medical status of immediate family members (includes ages, causes of death, etc).

Policies that may pay dividends to the policyowner are known as:

Participating

Which of the following is not a major source of underwriting information?

Past life insurance owned

Estate Conservation

Provides money to pay any estate taxes or loans which must be satisfied upon the death of the insured, preserving the insured's estate.

Conditional Receipt

Provides that coverage is effective as of the date of application or date of completed medical exam (if required), whichever is later, as long as the insurer would have issued the policy as standard or better. This receipt provides conditional coverage even if the underwriting process has not been completed. If an applicant is a substandard risk, there is no conditional coverage.

Survivor Protection

Providing funds for surviving spouses and dependents.

When replacement is involved, the insurer must:

Require the agent submit a Notice Regarding Application and a list of all existing policies or contracts, including the names of the insurers and policy numbers with the application Send to the existing life insurer within 3 working days of the date the application is received a written communication advising of the replacement or proposed replacement (this includes the identification information and a policy summary, contract summary, or a ledger statement containing policy data on the proposed life insurance or annuity) Maintain evidence of the Notice Regarding Replacement, the policy or contract summary, any ledger statements used, and a replacement register for at least 3 years Provide in its policy or a separate written notice that the applicant has a right to an unconditional refund of all premiums paid within 30 days from the date of policy delivery

Fixed

Specified amount of coverage, benefits and premium with no inflation protection

Which of the following receipts states that coverage will begin immediately for a specific length of time, regardless of whether the applicant is ultimately approved for coverage by the insurer?

Temporary insurance agreement

Expenses

The amount charged to cover each policy's share of expenses of operation (salaries, commission, premium taxes, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency.

Attained Age

The date when insurance coverage begins.

Expiration Date

The date when insurance coverage ends.

When an insurer accounts for the interest and mortality factors, then adds additional charges to meet all costs of a contract, it derives __________.

The gross premium

Policyowner

The individual who has ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily.

Insured

The individual whose life is covered under the policy. The insured's death results in the payment of the policy proceeds.

All of the following statements are true regarding HIV testing, except:

The insured must pay for the cost of the testing

Individual Selection Criteria

The insurer uses information collected by the field underwriter and other sources to determine the insurability of an individual. It is ultimately the home office underwriter's responsibility to determine if an individual meets the underwriting requirements of the insurer.

Policy Reserves

The net premiums paid plus additional interest earned must be set aside for future claims and possible contract obligations. A Reserve is the actuarial amount needed to cover potential liabilities to policyholders, such as cash surrender and nonforfeiture values

Fixed Life Insurance

The policy has a fixed amount of coverage, benefits, and premium. Without riders, future inflationary trends will cause the purchasing power of the policy's benefits to be reduced.

Rated-up Age

The premium for a "rated-up" policy is that of a standard risk, but for an insured 5 to 10 or more years older than the actual age of the proposed insured.

Consequences of Incomplete Applications

The producer's primary underwriting role is to make sure the application provides proper information for the insurer. The underwriter will return an incomplete application to the producer for completion by the applicant. If a policy is issued with questions unanswered, it is assumed the information is not material to the issuance and the insurer waives the right to challenge a claim based on the incomplete application.

Needs Analysis Approach

This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following steps into arriving at the proper amount of coverage needed: Calculate all financial needs caused by an immediate death, including debts, medical bills, and final expenses Provide lifetime income to the spouse Pay off a mortgage or other debt Provide funds for children's education An Emergency Reserve Fund may be part of the calculation to provide for unexpected emergencies the family might encounter immediately after the death of the insured Subtracts any assets available to fund financial needs after death (such as retirement plan assets, other insurance, liquid investments, separate savings)

Human Life Value

This approach is a measure of the projected future earnings and services of a person at risk in the event of a premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to his/her dependents using the following factors: The individual's age and gender The individual's occupation The individual's annual wage The individual's planned retirement age Inflation

Flexible Life Insurance

Universal and Variable Universal Life policies offer the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies have the potential to provide greater cash accumulation than whole life policies.

Variable

Uses separate account for cash value accumulation; may help protect against inflation; and an Insurance license and FINRA registration required in order to sell

Changes in the Application

Whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application.

Conservation

includes any attempt by the existing insurer or agent to deter a policyowner from the replacement of existing life insurance or an annuity. This does not include late payment reminders or reinstatement offers.

Temporary Insurance Agreement

is a receipt that provides immediate coverage during the underwriting period (rather than a specified number of days) until a policy is issued or the application is declined

Replacing insurer

is the insurer that issues a new policy which is a replacement of an existing policy or annuity contract.

Existing insurer

is the insurer whose policy is or will be changed or terminated through a replacement

Underwriting

is the process of selection, classification and rating, determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged. The purpose of underwriting is to prevent adverse selection. The sources of underwriting include the application, medical exams, an Attending Physician's Statement, the Medical Information Bureau (MIB) Report, an inspection report, agent's report, DMV records, and a hazardous activity questionnaire.