life insurance chapter 5

Medical Report

A medical report is sometimes used for underwriting policies with higher face amounts. If the medical section's information warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS).

Premiums and Receipts

Agents should make every effort to collect the initial premium with the application. However, if the premium is not collected with the application, the policy will not become valid until the initial premium is collected. The agent issues the applicant a premium receipt upon collecting the initial premium. The only time a customer will receive a receipt is if they pay their initial premium at the time of application. No receipt will be given at any other time. There are two types of premium receipts that determine when coverage will begin. These are conditional receipts and binding receipts. Conditional Receipt: The producer issues a conditional receipt to the applicant when the application and premium are collected. The conditional receipt denotes that coverage will be effective once certain conditions are met. If the insurer accepts the coverage as applied for, the coverage will take effect from the application or medical exam date, whichever is later. Binding Receipt: The binding receipt, or the temporary insurance agreement, provides coverage from the date of the application regardless of whether the applicant is insurable. Coverage usually lasts for 30 to 60 days, or until the insurer accepts or declines the coverage. Binding receipts are rarely used in life insurance and are primarily used in auto and homeowners' insurance. Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. This may also be described as the insurer is bound to coverage until the application is formally rejected. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application.

Credit Reports

An applicant's credit history is sometimes used for underwriting and determines the likelihood of making premium payments. The Fair Credit Reporting Act requires the applicant to be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

Effective Date of Coverage

As explained under conditional receipt, coverage is not effective without the collection of the initial premium, approval of the application, and policy issuance and delivery. If the initial premium does not accompany the application, the premium must be collected by the agent. In some cases, the insurer requires the agent to collect a good health statement from the insured at the delivery time. If the initial premium is not submitted with the application, the policy effective date is established by the insurer. In this case, it could be the date the policy is issued. Generally, for a policy to be in effect: The insurer must issue the policy; The insured must submit the initial premiums; and If applicable, the insured must sign a statement of continued good health. The effective date is important for two reasons: it identifies when the coverage is effective and establishes the date by which future annual premiums must be paid.

FIELD UNDERWRITING PROCEDURES

Field underwriting is completed by the agent. Unlike the insurer, the agent has face-to-face contact with the applicant, which can aid the insurer in risk selection. As field underwriters, agents help reduce the chance of adverse selection, assure that the application is filled out completely and correctly, collect the initial premium, and deliver the policy. Other duties include: Forwarding the application to the insurer in a timely manner Seeking additional information about the applicant's medical history if requested Notifying the insurer of any suspected misstatements in the application Assuring the application is filled out completely and correctly Collect the initial premium In addition to that, agents have the responsibility and duty to solicit only profitable business. Therefore, an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer's underwriting guidelines and represent profitable business to the insurer. Upon policy delivery, agents must deliver the life insurance buyer's guide and policy summary to the applicant. A life insurance producer may also be required to obtain a signature on a good health statement at the time of policy delivery.

Application Errors

If an agent realizes that an applicant has made an error on an application, the agent must correct the information and have the applicant initial the changes. An incomplete application will be returned to the agent. The agent can NEVER change the application without the customer present to initial the changes.

Agents must provide all life insurance applicants with a

Life Insurance Buyer's Guide and a Policy Summary

CLASSIFICATIONS OF RISK

Once all the information about a given applicant has been reviewed, the underwriter will utilize several different types of information in determining the insurability of the individual and the risk that the applicant poses to the insurer. This evaluation is known as risk classification. The following rating classification system is used to categorize the favorability of a given risk: Preferred - Low Risk - Lower Premiums. Lower risks tend to have lower premiums. Some of the following may result in a policy being issued with a preferred insurance premium:The applicant does not smoke or drink Good personal/family health history Standard - Average Risk - No Extra Ratings or Restrictions. Standard terms and rates Substandard - High Risk - Rated Up - Higher Premiums due to chronic conditions, insulin diabetes, or heart disease Declined - Not Insurable - Potential of Loss to Insurance Company is Too High. Terminal illness, too many chronic conditions

The three essential parts to a typical life insurance application:

Part I: General Applicant Information Part I of the application asks general questions about the proposed insured, including name, age, address, birth date, sex, income, marital status, and occupation. Part II: Medical and Health History Part II focuses on the proposed insured's health and asks several questions about the health history of the family. Part III: The Agent's Report or Statement Part III includes additional information about the applicant's financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant.

Policy Issue

Policy issue happens when the insurer "approves" the application; they are "issuing the policy." The insurance issued contract is sent to the sales agent for delivery to the applicant. The policy usually is not sent to the policyowner because the sales agent should explain it to the policyowner. Technically a policy could be ISSUED and not delivered for days or weeks later. Constructive delivery: policy delivery may be accomplished without physically delivering the policy into the policyowner's possession. Constructive policy occurs if the 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 the agent never personally delivers the policy. If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery. The Statement of good health: verifies that the insured has not become ill, injured, or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application. It is used when the applicant did not submit the initial premium with the application in such cases. Common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health. Statements of good health are also used when reinstating a policy. Personal delivery of the policy is a good practice as it allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personal delivery also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent, mailing the policy to the applicant, and the agent personally delivering policy.

There are three different risk classifications:

Preferred risk Standard Risk Substandard Risk

Fair Credit Reporting Act of 1970 (FCRA)

Regulates how credit information is collected and used to protect consumers' rights for whom an inspection or credit report has been requested. Information regarding an individual's credit standing and general reputation is contained in a consumer report. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. If an insurance company requests a credit report, the consumer must be notified in writing. The applicant has the right to receive a copy of the report when an investigative consumer report is used in connection with an insurance application.

Suitability Form

Suitability Form Ensures that the customer is best suited for the policy they are purchasing. Suitability forms help prevent the sale of unnecessary insurance. For example, a 75-year-old customer living off of Social Security would not be suited for a single premium deferred annuity because they would be giving up a large sum of cash that they could live on and possibly not live long enough to collect on the annuity.

Medical Information Bureau

The MIB is a nonprofit trade organization that maintains medical information about individuals. Information from the MIB is used by life and health insurance companies to help avoid adverse selection by applicants. It detects misrepresentations, helps identify fraudulent information, and controls the cost of insurance. Information released from the Medical Information Bureau about a proposed insured may be released to the proposed insured's physician. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. An insurance company will NOT notify the MIB if an application is declined.

USA Patriot Act

The USA Patriot Act was enacted in 2001. It requires insurance companies to establish formal anti-money laundering programs. The purpose of the act is to detect and deter terrorism. A life insurance policy can be cash-surrendered, which can be an attractive money-laundering vehicle because it allows criminals or terrorists to put dirty money in and take clean money out in the form of an insurance company check.

Signatures

The agent and the applicant are required to sign the application. If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application. Having a policy owner (applicant) that is different from the insured (parent and minor child) is considered third party ownership in most states. Once a minor reaches the age of 15, he is eligible to contract for an insurance policy. If an agent fails to deliver a fully completed and accurate application, the insurance company will return the agent's application. When an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but the applicant must initial the correction. However, if the company discovers the mistake before the applicant, it usually returns the agent's application. The agent then corrects the mistake with the applicant and has the applicant initial the change. An incomplete application will be returned to the producer, and a new one will have to be filled out.

conditional receipt

The date appearing on a conditional receipt always reflects a date earlier than the issue date of the policy

UNDERWRITING PROCESS

The underwriting process involves reviewing and evaluating the applicant's information and establishing individual guidelines against the insurer's standards and guidelines for insurability and premium rates. The larger the policy, the more comprehensive and diligent the underwriting process. The most common sources of underwriting information include: The application The medical report Attending physician's Statement The Medical Information Bureau Special Questionnaires Inspection Reports Credit Reports Application: The application is the starting point and primary source of information used by the insurance company in the risk selection. Although applications differ from company to company, they all have the following same components. Insurable interest must exist between the policyowner and insured at the time when the application is made. Insurable interest exists when the death of the insured would have a clear financial impact on the policyowner. Part I of the Application General Information - Age, DOB, Sex, Address, Marital Status, Occupation, Details about the requested insurance coverage: Type of policy Amount of insurance Name and relationship of the beneficiary Other insurance the proposed insured owns Other information personal information Tobacco use Hazardous hobby Foreign travel Aviation activity Military service. Part II of the Application Medical Information - Health History Part II focuses on the proposed insured's health and asks several questions about the proposed insured's health history. This medical section must be completed in its entirety for every application. Depending on the proposed policy, this section may or may not be all that is required in the way of medical information. The individual to be insured may be required to take a medical exam or provide a blood test or urine specimen. Part III of the Application The Agent's Report (Statement) includes the agent's observations of the applicant. Includes the applicant's financial condition, character, background, the purpose of sale, and how long the agent has known the applicant. Because the agent represents the insurance company's interests, the agent is expected to complete this part of the application thoroughly and t

Inspection Reports

This report provides information about the applicant's character, lifestyle, and financial stability. Due to their cost, inspection reports are usually only requested for more extensive coverages. However, company rules vary as to the sizes of policies that require a report by an outside agency. When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report.

If an insurance company requests a credit report, the consumer must be notified in writing

This report provides information about the applicant's character, lifestyle, and financial stability. When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report.

PURPOSE OF UNDERWRITING

Underwriting is the process used by an insurance company to determine if an applicant is insurable and, if the applicant is insurable, how much to charge for premiums. The underwriter will utilize several different types of information in determining the insurability of the individual. Material facts can affect an applicant being accepted or rejected. One of the primary responsibilities of an underwriter is to protect the insurer against adverse selection. The underwriter classifies each proposed insured's risk and selects only those with an acceptable risk per the insured's underwriting guidelines.

Warranty

Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

Health Insurance Portability and Accountability Act

a privacy rule that provides federal protections for an individual's health information. Furthermore, HIPAA gives patients an array of rights concerning individually identifiable health information. When an agent submits an application that reveals personal information regarding the applicant, the agent is responsible for providing the insurance applicant with privacy notices.

The applicant must initial

any changes to the contract

Representations

are statements an applicant makes as being substantially true to the best of the applicant's knowledge and belief

Warranties

are statements that are guaranteed to be true

Incomplete applications

are to be returned to the agent

Special Questionnaires

are used for applicants involved in particular circumstances, such as aviation, military service, or hazardous occupations or hobbies. The questionnaire provides details on how much of the applicant's time is spent on these activities

Binding Receipt

coverage is guaranteed until the insurer formally rejects the application

USA Patriot Act

detect and deter terrorism

Representations

include statements made by the applicant that are substantially true to the best of their knowledge but not warranted as exact in every detail

Medical Information Bureau

is a clearinghouse of health information supplied by insurers from information on applications

Anyone under the age of 15

is considered a minor in life insurance contracts

applicant

is the person requesting the insurance and completing the application

underwriter

is the person reviewing the application for insurance.

proposed insured

is the person who is obtaining the insurance, the life (person) who is to be insured.

policyowner

is the person who, if the insured is approved, will retain all rights and options of the policy

Backdating

is the process of predating the application a certain number of months to achieve a lower premium. A younger age at the time of application results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. Applications usually can only be backdated for up to 6 months. This process is also known as "saving age." In addition, policyowners are required to pay all back-due premiums, and the next premium is due at the backdated anniversary date.

law of large numbers

mathematical law of probability that states the larger the number of occurrences, the more predictable losses will be

Policy Delivery

may be accomplished without physically delivering the policy into the policyowner's possession

field underwriter or producer

may solicit appointments, complete applications, collect premiums, and submit applications to the home office underwriter, but it does not issue the policy

insurable interest

must exist only at the policy inception

inspection reports

obtained for life and health insurance contracts with high benefit amounts

Applicant Ratings

once all the information about a given applicant has been reviewed, the underwriter seeks to classify the applicant's risk to the insurer. This evaluation is known as risk classification.

Buyer's guide

provides general information about the types of life insurance policies available in simple language that can be understood by the average person. (i.e., a general description of whole life, a general description of term life, essential characteristics of variable life, etc.)

Policy Summary

provides specific information about the policy purchased, such as the premium and benefits. For example, your grandmother calls you excited because she bought new health insurance but can't tell you what it is. The policy summary allows you to quickly see what "health insurance" specifically, she bought: Medicare Supplement, Major Medical, Critical Illness, Long-term Care, etc.

backdating

purpose of doing backdating a policy is to use premiums based on an earlier age

The Fair Credit Reporting Act of 1970 (FCRA)

regulates how credit information is collected and used to protect consumers' rights for whom an inspection or credit report has been requested. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports.

nonmedical application

requires no additional information other than the application

Adverse selection

underwriting concept that involves the tendency of higher risks to seek insurance coverage