Life Insurance Underwriting and Policy Issue

Medical Information Bureau (MIB)

The MIB report will also *identify life insurance in force with other carriers as well as lifestyle habits such as drug use.* The bureau is formed by more than 700 member insurance companies. *Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician.*

Completing the Application

*An insurance company will return the application to the agent if the agent submits an incomplete application. Representations are statements an applicant makes as being substantially true to the best of the applicant's knowledge and belief,*but which are not warranted to be exact in every detail. *Warranties are statements that are guaranteed to be correct. Each application requires the signatures of the proposed adult insured, the policy owner (if different from the insured), and the agent who solicits the application. The applicant's signature is required on a life insurance application to represent that the statements on the application are true to the best of the applicant's knowledge.*

Buyer's Guide

*As in many states, an agent is required to deliver to the applicant a Life Insurance Buyer's Guide and a Policy Summary. These documents are usually delivered before the agent accepts the applicant's initial premium.* The buyer's guide is a generic publication that explains life insurance in a way that average consumers can understand.

Constructive Delivery

*Constructive delivery is accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policy owner, 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. Only by personally delivering a policy does the agent have a timely opportunity to review the contract and its provisions, exclusions, and riders. Explaining the policy and how it meets the policy owner's specific objectives helps avert misunderstandings, policy returns, and potential lapses.*

Initial Premium and Receipts

*If a premium is not paid with the application, the agent should submit the application to the insurance company without the premium. The policy will not become valid until the initial premium is collected.

Conditional Receipts

*The most common type of premium receipt is the conditional receipt.* A conditional receipt indicates that certain conditions must be met in order for the insurance coverage to go into effect. *The conditional receipt provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam.*

Backdating

*The purpose of backdating a life insurance policy is to use premiums based on an earlier age. Many insurers are willing to let an applicant backdate (or "save age") a policy.* Most insurers impose a time limit on how far back a policy can be backdated (typically six months).

Binding Receipts

*Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. Even if the proposed insured is ultimately found to be uninsurable,* coverage is still guaranteed until the rejection of the application.

Changing An 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.*

Substandard Risk

A substandard risk is one below the insurer's standard or average risk guidelines. An individual can be rated as substandard for any number of reasons: poor health, a dangerous occupation, or attributes and habits that could be hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an *increase in their policy premium.*

USA Patriot Act

Enacted in 2001, requires insurance companies to establish formal anti-money laundering programs. *The purpose of the USA Patriot Act is to detect and deter terrorism.*

Obtaining A Statement of Good Health

In some instances, the initial premium will not be paid until the agent delivers the policy. *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.* The insurance company has the right to know if the policy owner represents the same risk to the company as when the application was first signed.

Insurable Interest

Insurable interest exists when the death of the insured would have a clear financial impact on the policy owner. Individuals are generally presumed to have an *unlimited insurable interest in themselves.* Therefore, when the applicant and proposed insured is the same person, there is no question that insurable interest exists. *It bears repeating that with life insurance, an insurable interest must exist only at the policy inception. It does not necessarily have to exist when the policy proceeds are actually paid.* Thus, a policy owner could assign a life policy to someone who has no insurable interest in the insured, and the assignment would nonetheless be valid.

Preferred Risk

Many insurers reward good risks by assigning them to a preferred risk classification. Companies issue preferred risk policies with reduced premiums with the expectation of better than normal mortality or morbidity experience. *Characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking.*

An Application

Part 1 - General 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 2 - Medical Information *Part II focuses on the proposed insured's health and asks a number of questions about the health history*, not only of the proposed insured, but of the proposed insured's family too. Part 3 - Agent's Report *In Part III, the agent provides 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.*

Credit Reports

Some applicants may prove to be poor credit risks, based on information obtained before a policy is issued. Thus, credit reports obtained from retail merchants' associations or other sources are a valuable underwriting tool in many cases.

Policy Summary

The policy summary addresses the specific product being presented for sale. It identifies the agent, the insurer, the policy, and each reider. It includes information about premiums, dividends, benefit amounts, cash surrender values, policy loan interest rates, and life insurance cost indexes of the specific policy being considered.

Inspection Reports

The purpose of these reports is to provide a picture of an applicant's general character and reputation, mode of living, finances, and any exposure to abnormal hazards. Investigators or inspectors may interview employees, neighbors, and associates of the applicant, as well as the applicant. *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.* An insurer's obligation involving the disclosure of an insured's nonpublic information is to *give notice, explain, and allow opting out. If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that it is permitted to do so under The Fair Credit Reporting Act.*

Standard Risk

The term used for individuals who fit the insurer's guidelines for policy issue without special restrictions or additional rating. These individuals meet the same conditions as the tabular risks on which the insurer's premium rates are based.

Risk Classification - Applicant Ratings

The underwriter seeks to classify the level of risk that the applicant poses to the insurer.

Fair Credit Reporting Act of 1970

To protect the rights of consumers for whom an inspection or report has been requested, Congress in 1970 enacted the *Fair Credit Reporting Act. This federal law applies to financial institutions that request these types of consumer reports.* Insurance companies fall under this category.