Chapter 1 Quiz Q's - Completing the Application, Underwriting, and Delivering the Policy

What is the purpose of a disclosure statement in life insurance policies? A) To explain features and benefits of a proposed policy to the consumer B) To obtain important underwriting information from the applicant C) To help consumers compare policy prices D) To protect agents and insurers against lawsuits

ANSWER: A EXPLANATION: Disclosure statements will help the applicants to make more informed and educated decisions about their choice of insurance.

Representations are written or oral statements made by the applicant that are A) Guaranteed to be true. B) Found to be false after further investigation. C) Immaterial to the actual acceptability of the insurance contract. D) Considered true to the best of the applicant's knowledge.

ANSWER: D EXPLANATION: Representations are statements made by an applicant that they believe to be true.

Under the Fair Credit Reporting Act, individuals rejected for insurance due to information contained in a consumer report A) Are entitled to obtain a copy of the report from the party who ordered it. B) Must be advised that a copy of the report is available to anyone who requests it. C) May sue the reporting agency in order to get inaccurate data corrected. D) Must be informed of the source of the report.

ANSWER: D EXPLANATION:

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? A) Return to the applicant for completion B) Answer the missed questions for the applicant C) Acknowledge the missed questions with a signature and continue the policy issue process D) Proceed with issuing a policy

ANSWER: A EXPLANATION: Any unanswered questions need to be answered before the policy is issued. If the insurer receives incomplete applications, they need to be returned to the applicants for completion.

The term "illustration" in a life insurance policy refers to A) A presentation of nonguaranteed elements of a policy. B) A depiction of policy benefits and guarantees. C) Pictures accompanying a policy. D) Charts and graphs.

ANSWER: A EXPLANATION: The term "illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.

Which of the following would provide an underwriter with information concerning an applicant's health history? A) The Medical Information Bureau B) A medical examination C) The agent's report D) The inspection report

ANSWER: A EXPLANATION: An agent's report and inspection report provide personal information. Medical exams provide information on current health. Only the MIB will provide information about an applicant's medical history.

Which of the following is NOT the consideration in a policy? A) The application given to a prospective insured B) Something of value exchanged between parties C) The premium amount paid at the time of application D) The promise to pay covered losses

ANSWER: A EXPLANATION: Consideration is something of value that is transferred between the two parties to form a legal contract.

Which of the following is used to compare the cost of one life insurance policy against another in order to guide prospective purchasers to policies that are competitively priced? A) Policy cost guides B) Consumer price indices C) Policy cost indices D) Cost comparison methods

ANSWER: D EXPLANATION: Cost comparison methods are used to compare the cost of one life insurance policy against another in order to guide prospective purchasers to policies that are competitively priced.

If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it? A) Conditional B) A legal (but unethical) contract C) Unilateral D) Adhesion

ANSWER: C EXPLANATION: In a unilateral contract, only one of the parties to the contract is legally bound to do anything.

When is the earliest a policy may go into effect? A) When the insurer approves the application B) After the underwriter reviews the policy C) When the application is signed and a check is given to the agent D) When the first premium is paid and the policy has been delivered

ANSWER: C EXPLANATION: The policy can be effective as early as the date of the application, if the premium is submitted with the application and the policy is issued as applied for.

Which of the following individuals must have insurable interest in the insured? A) Beneficiary B) Underwriter C) Producer D) Policyowner

ANSWER: D EXPLANATION: The policyowner must have an insurable interest in the insured (his/her own life if the policyowner and the insured is the same person), or in the life of a family member or a business partner.

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 a medical exam. If the policy is issued, what would be the policy's effective date? A) The date of application B) The date of medical exam C) The date of policy delivery D) The date of issue

ANSWER: B EXPLANATION: If the company acknowledges receipt of the premium with a conditional receipt, the policy is in effect on the date of the application or the date of the medical exam (whichever is later), provided that the applicant is found insurable at the rate applied for.

When would a misrepresentation on the insurance application be considered fraud? A) When the application is incomplete B) Any misrepresentation is considered fraud. C) If it is intentional and material D) Never: statements by the applicant are only representations.

ANSWER: C EXPLANATION: A misrepresentation would be considered fraud if it is intentional and material. Fraud would be grounds for voiding the contract.

If a person is compensated for a testimonial in an advertisement, which of the following statements should be included in the advertisement? A) Commissioned advertisement B) Paid endorsement C) Insurer is not responsible for the contents of the testimonial D) The author is the employee of the insurer

ANSWER: B EXPLANATION: The ad must disclose whether the person making the testimonial has a financial interest in the insurer. If the person is compensated, the testimonial must include "Paid Endorsement" or similar language.

Is it illegal for an insurance company to advertise that it is the leader of the financial industry and therefore pays the most claims each year? A) Yes, as long as no one can prove otherwise. B) No, as long as the advertisement has a disclaimer that all facts are misleading. C) No D) Yes; advertisements must not mislead the public in terms of financial standing.

ANSWER: D EXPLANATION: Advertisements must not mislead the public or attempt to induce a person to purchase insurance because of false advertisement.

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe? A) Unidirectional B) Aleatory C) Conditional D) Unilateral

ANSWER: D EXPLANATION: In a unilateral contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

The mode of premium payment A) Is the factor that determines the amount of dividends in a policy. B) Is the method used to compute the cash surrender value of the policy. C) Does not affect the amount of premium paid. D) Is defined as the frequency and the amount of the premium payment.

ANSWER: D EXPLANATION: he mode refers to the frequency the policyowner pays the premium: monthly, quarterly, semiannually, or annually. The amount of premium will change accordingly.

Which of the following CANNOT be included along with illustrations used to sell life insurance? A) Original death benefit B) Vanishing premium information C) Name of the insurer D) Rating information

ANSWER: B EXPLANATION: Illustrations used to sell life insurance cannot use the term "vanishing premium" - or any similar term - that implies the policy becomes paid up.

Which of the following best describes the MIB? A) It is a member organization that protects insured against insolvent insurers. B) It is a rating organization for health insurance. C) It is a nonprofit organization that maintains underwriting information on applicants for life and health insurance. D) It is a government agency that collects medical information on the insured from the insurance companies.

ANSWER: C EXPLANATION: The Medical Information Bureau (MIB) is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals.

Which of the following best describes gross annual premium? A) Basic insurance rate plus commissions B) Expense premium C) Net premium plus expenses D) Annual loading

ANSWER: C EXPLANATION: Gross annual premium is net premium plus expenses (loading).

Which of the following is a risk classification used by underwriters for life insurance? A) Poor B) Normal C) Excellent D) Standard

ANSWER: D EXPLANATION: The three ratings classifications that denote the risk level of insureds are standard, substandard, and preferred. This classification system helps insurers to decide if an insured should pay a higher premium.

In forming an insurance contract, when does acceptance usually occur? A) When an insurer's underwriter approves coverage B) When an insurer delivers the policy C) When an insurer receives an application D) When an insured submits an application

ANSWER: A EXPLANATION: In insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

The Federal Fair Credit Reporting Act A) Regulates telemarketing. B) Prevents money laundering. C) Regulates consumer reports. D) Protects customer privacy.

ANSWER: C EXPLANTION: The Federal Fair Credit Reporting Act regulates consumer reports, also known as consumer investigative reports, or credit reports.

Which of the following best details the underwriting process for life insurance? A) Selection, classification, and rating of risks B) Solicitation, negotiation and sale of policies C) Issuance of policies D) Reporting and rejection of risks

ANSWER: A EXPLANATION: The underwriting process is accomplished by reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer's standards and guidelines for insurability and premium rates.

Which is the appropriate action by the insurer if a prospective insured submitted an incomplete application? A) Return the application to the applicant for completion B) Issue a policy anyway since the application has been submitted C) Ask the producer who solicited the policy to complete and resign the application D) Fill in the blanks to the best of the insurer's knowledge

ANSWER: A EXPLANATION: Any unanswered questions need to be answered before the policy is issued. If the insurer receives incomplete applications, they need to be returned to the applicants for completion.

When Y applied for insurance and paid the initial premium on August 14, he was issued a conditional receipt. During the underwriting process, the insurance company found no reason to reject the risk or classify it other than as standard. Y was killed in an automobile accident on August 22, before the policy was issued. In this case, the insurance company will A) Issue the policy anyway and pay the face value to the beneficiary. B) Negotiate a reduced settlement with the beneficiary due to the unusual circumstances involved. C) Return the premium to Y's estate, since it has no obligation to pay the death claim. D) Keep the premium and reject the risk on the basis that the applicant died before the policy could be issued.

ANSWER: A EXPLANATION: The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for.

Upon policy delivery, the producer may be required to obtain any of the following EXCEPT A) Payment of premium. B) Delivery receipt. C) Signed waiver of premium. D) Statement of good health.

ANSWER: C EXPLANATION: The policy does not go into effect until the premium has been collected. If the premium was not collected at the time of the application, the producer may also be required to get a Statement of Good Health from the applicant at the time of policy delivery. Waiver of premium is a rider that can be added to a life insurance policy, and not something to be obtained from the applicant.

Which of the following is NOT required on an illustration used in the sale of a life insurance policy? A) Generic name of policy B) Name of insurer C) Underwriting or rating classification upon which the illustration is based D) The name of the primary and secondary beneficiaries

ANSWER: D EXPLANATION: Other required items include the name and business address of producer or insurer's authorized representative; the name, age and sex of proposed insured; underwriting or rating classification upon which the illustration is based; and the initial death benefit.

A producer agent must do all of the following when delivering a new policy to the insured EXCEPT A) Disclose commissions earned from the sale of the policy. B) Explain the policy provisions, riders, and exclusions. C) Collect any premium due. D) Explain the rating procedures if the policy is rated differently than applied for.

ANSWER: A EXPLANATION: A producer must explain policy provisions, exclusions, and riders at the time of delivery, as well as the rating procedures, especially if the policy is rated differently than applied for. The producer must also collect any due premium and have the insured sign the statement of continued good health.

All of the following are duties and responsibilities of producers at the time of application EXCEPT A) Change any incorrect statement on the application by personally initialing next to the corrected statement. B) Explain the nature and type of any receipt the producer is giving to the applicant. C) Probe beyond the stated questions if the producer feels the applicant is misrepresenting or concealing information. D) Check to make sure that there are no unanswered questions on the application.

ANSWER: A EXPLANATION: Any changes to information on an application must be initialed by the applicant.

An applicant signs an application for a $25,000 life insurance policy, pays the initial premium, and receives a conditional receipt. If the applicant dies the following day, which of the following is TRUE? A) The beneficiary will receive the full death benefit if it is determined that the applicant qualified for the policy. B) The premium would be returned to the insured's estate because the policy was not issued. C) The death claim will be rejected. D) The application will be voided.

ANSWER: A EXPLANATION: 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 examination, if one is required.

All of the following are requirements for life insurance illustrations EXCEPT A) They must identify nonguaranteed values. B) They must differentiate between guaranteed and projected amounts. C) They must be part of the contract. D) They may only be used as approved.

ANSWER: C EXPLANATION: All of the following are requirements for life insurance illustrations EXCEPT AThey must identify nonguaranteed values. BThey must differentiate between guaranteed and projected amounts. CThey must be part of the contract. DThey may only be used as approved.

An applicant who receives a preferred risk classification qualifies for A) Dividends payable for lack of claims. B) Higher premiums than a person who receives a sub-standard risk. C) Higher premiums than a person who receives a standard risk. D) Lower premiums than a person who receives a standard risk.

ANSWER: D EXPLANATION: The preferred risk category is reserved for those persons with a superior physical condition, lifestyle, and habits.