Chapter 2

Classification of Risks

Standard, Preferred, Substandard

policyowner

- The purchaser of a life insurance policy - controls and make decisions regarding the policy - has the right to name a beneficiary

All of the following become part of the entire contract, except: A A copy of the check B Any riders C The policy itself D A copy of the application

A A copy of the application, if attached to the policy, becomes part of the entire contract along with any amendments, riders, or endorsements.

APS

Attending Physician Statement (APS)

Which of the following is not true about life insurance applications? A Primary source of underwriting B Confidential communication between the agent and the insurer C Contains two parts: General Information and Health History D May contain all the necessary information to determine insurability

B A copy of the application will be included as part of the policy, and is therefore not confidential.

A personalized computer-generated illustration detailing premiums, cash values, interest rates, and surrender values is called __________. A An advertisement B A policy summary C A hypothetical D Sales literature

B Policy summaries detail premiums, cash values, interest rates, and cash surrender values of a particular policy for a specific insurance prospect.

Information from a third party collected by the insurance company in the application for insurance and during underwriting of the policy may be subject to the jurisdiction of which of the following? A USA PATRIOT Act B HIPAA C Fair Credit Reporting Act D Unfair Claims Practices Act

C The Fair Credit Reporting Act has jurisdiction over information collected through a third-party for underwriting purposes.

All of the following signatures would be required on a life insurance application for an adult, except that of the: A Applicant B Producer C Beneficiary D Insured

C Both the producer and the applicant / insured must sign the application. If the applicant is a minor, a guardian must sign the application.

If an applicant is a minor, who signs the application? A Any adult B The producer C A probate court judge D Their guardian

D If the applicant is a minor, a guardian must sign the application.

If an insured pays a premium that is lower than others that are in the same class, this insured is considered to be rated as? A Reduced B Substandard C Standard D Preferred

D Individuals who meet certain requirements (such as ideal health, height and weight, low occupational stress, etc.) are preferred risks.

Which of the following products provides an immediate lump sum in the event of premature death? A Disability Insurance B Social Security C Annuity D Life insurance

D Of these options, only life insurance provides an immediate lump sum upon death.

The person who submits an application for insurance is always referred to as the _______. A Beneficiary B Insured C Owner D Applicant

D The person who submits an application for insurance is always referred to as the applicant.

individually identifiable health information

Documents or bits of information that identify the person or provide enough information so that the person could be identified.

Preneed Plan

Funds parts of or all of a funeral service and burial.

third-party ownership

If the policy is owned by a person other than the insured

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

Substandard Risks (Higher Risk Exposure)

Individuals who are not acceptable at standard rates because of poor health, bad habits or occupational hazards. - this category are issued "rated policies," known as surcharges -If a policy is not approved as applied for and is issued as substandard, the insurer may make a "counteroffer" to the applicant

MIB

Medical Information Bureau

What is on the face page of the policy?

Name of the insurance company Name of the insured and policyowner Face amount of the policy Basic description of the type of policy purchased Policy number and anniversary date The insurance company's promise to pay the death benefit (Insuring Clause)

Underwriting Factors

Nature of the risk Hazards that are present Claims history Other factors that depend upon the type of risk being insured examples Age Gender Tobacco use (smoker/nonsmoker) Occupation Hobbies (avocation) Physical condition (height and weight) Health history

HIPAA's privacy rules are implemented to

Protect the privacy of all individually identifiable health information

Binding Receipt (Unconditional)

Provides coverage as soon as premium is received (before approval) - usually not allowable in connection to the sale of life insurance

Estate Conservation

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

Survivor Protection

Providing funds for surviving spouses and dependents

Existing Insurer

The insurer who issued the policy to be replaced

Agent's Report

a personal statement submitted by the producer, to the insurer, regarding the applicant's financial condition, any personal knowledge of the applicant - one purpose: to provide information in order for the insurer to determine insurability

Policy Summary

a written statement describing the features and elements of the policy being issued

Expenses loading

amount charged to cover each policy's share of expenses of operation

Exemption from creditors

benefits payable to a beneficiary are exempt from the insured's creditors

Rating Applicants

classification to be used in the calculation of the premium

Mode

frequency of payment - more frequently the premiums are paid, the more expensive the mode of payment - Premium payments are made either monthly, quarterly, semiannually, or annually

Factors in Premium Determination

mortality, interest, and expense

MIB's underwriting services

used exclusively by member life and health insurance companies to assess an individual's risk and eligibility during the underwriting of life and health policies - services "alert" underwriters to fraud, errors, omissions or misrepresentations made on insurance applications, and the MIB may help lower the cost of life and health insurance for consumers

Attending Physician Statement (APS)

used in cases in which the individual application and/or medical reports reveal conditions for which further information is necessary to determine insurability

Declined

not a rating classification, but a decision that the risk is one for which the insurer refuses to issue insurance. - applicant is deemed uninsurable

Underwriting

the process of selection, classification, and rating the process of determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged

When an insurer requires that an insured be subjected to a medical examination, who pays for the medical exam? A The insurer B The producer C The insured D The applicant

A The insurer pays for any medical exam it orders.

Application

- primary source of underwriting - 2 parts *1. general questions *2. medical background

Interest

- used to calculate premium - reduce the amount of premium needed to fund the future liability of the policy death benefit.

four different phases in the sale of products

1. solicitation 2.negotiation 3.execution of a contract 4. handling matters subsequent to a contract

Inspection Report

general report of the applicant's finances, character, morals, work, hobbies, and other habits - aka Consumer Investigative Report - inspection report will confirm and elaborate on information provided on the application - information collected over phone interview and may be extended to character references (neighbors or coworkers)

Source of underwriting

include the application, medical exams, an Attending Physician's Statement, the Medical Information Bureau (MIB), an inspection report, and the agent's report

Insurable Interest

something of value that, if lost, would cause you financial harm Examples of insurable interest include a spouse, other immediate family members, business partners, or creditors of the insured.

Insurance Producer

- are tasked with educating consumers and helping them meet their needs - assess the potential client's financial information, goals, and objectives to calculate the appropriate amount of insurance needed - initial point of contact for most insurance transactions

Transacting Insurance

Conducting insurance business, such as soliciting or negotiating to buy or sell an insurance policy.

Preferred Risk

Individuals who meet certain requirements and qualify for lower premiums - this category have a longer than average life expectancy

Medical Information Bureau Report

collect adverse medical information about an applicant's health and act as an information exchange - member- owned corporation - operates on a not- for-profit basis - cannot be used to decline an applicant for insurance example The insurer receives a prepaid application. Upon the receipt of the MIB report, health problems are revealed. The underwriter will then require additional information in the form of an Attending Physician Statement (APS) and/or possibly a medical examination. The underwriter may rate or deny the application based on this additional information. The MIB report reveals only past medical concerns and cannot be used as the only source for rating or denying an application

Constructive delivery

the insurer mails the policy to the producer

Replacing Insurer

the insurer responsible for issuing the new policy that will replace the existing policy

Legal delivery

the producer delivers the policy to the owner or insured

Adverse Selection

unhealthy or high risk applicants, and to insure only those risks that meet certain criteria

Statement of Good Health

verifies that the insured has remained in the same health status continuously since the time of the application

Confidential information shared by the producer to the insurer and does not become part of the policy is the __________. A Attending Physician Statement B Agent's Report C Medical Examination D Consumer Investigative Report

B An agent's report is a personal statement submitted by the producer to the insurer about information the agent would like to share with the insurer on a confidential basis that they may have learned during the application process while at the applicant's home or place of business.

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.

Estate Creation

Life insurance proceeds paid in a lump sum provide financial assets to create an immediate estate the insured can pass on to survivors

Replacing Insurer responsibilities

Notifying the existing insurer of the planned replacement upon receiving proper notification with the new application Maintaining copies of the information regarding replacement for a specified period of time

Determine if the following statements occur while the application is being completed,during the underwriting process, or when the policy is delivered. Classification of risk and rating Producer explains rating, premiums, coverages, and policy benefits Constructive delivery Formal request for the insurer to issue a policy Conditional receipt may be issued' MIB report may be requested Required signatures Insurability is determined Statement of Good Health

Underwriting Process Classification of risk and rating MIB report may be requested Insurability is determined Policy Delivery Statement of Good Health Producer explains rating, premiums, coverages, and policy benefits Constructive delivery Completing the Application Conditional receipt may be issued Required signatures Formal request for the insurer to issue a policy

Trial Application

one submitted without a premium C.O.D., or collect on delivery

beneficiary

one who benefits from something; a person who is left money or other property in a will or the like

Viaticle settlement

policy may be purchased by a third party from a terminally ill insured providing immediate cash prior to death example: policyowner going to die in next 24 months and sales the policy to get tax free money

MIB's coded reports

represent general medical information and other conditions (typically hazardous hobbies and adverse driving records) affecting the insurability of the applicant

replacement

s any transaction in which a new life policy or annuity is to be purchased, and the producer knows, or should know, that existing contract(s) will be: Lapsed, forfeited, surrendered, or terminated Reduced in value Amended with a reduction in benefit or term Reissued with a reduced cash value Subjected to borrowing

conservation

the act of saving or keeping the existing policy and preventing it from being replaced.

Producer Responsibilities

- Completing a Notice Regarding Replacement - Obtaining information regarding any existing policies, including the names of the existing insurers and policy numbers (this must be provided to the replacing insurer) - Providing copies of the Notice Regarding Replacement and any sales proposals to the applicant and replacing insurer

Mortality

- men have higher premium than a female - mortality tables are used higher the age group, the higher the mortality rate—translating to a higher premium

J is named in a policy as the individual who is entitled to receive the policy proceeds upon the death of T. Which of the following statements best applies to this scenario? A T is the insured in the policy and J is the named beneficiary B J is the insured and beneficiary of the policy C T is the owner and beneficiary of the policy D J is named as the owner of T's policy

A Based on the information provided, the only assumption that can be made is that T is the insured and J is the named beneficiary. The owner of the policy is not specified and could either be J or T.

An application for insurance is completed and submitted to an insurance company. In order for coverage to be effective immediately, all of the following conditions must be met, except: A The policy is issued at a higher risk than the standard risk applied for B A medical exam is not required C A conditional receipt is issued D The initial premium is submitted with the application

A In order for coverage to be effective immediately, the policy must be issued as applied for.

A life insurance policy is being applied for on Z's life. In order for the contract to be valid, all of the following have an insurable interest and could be the owner of the policy, except: A Z's neighbor B Z C Z's spouse D Z's business partner

A Insurable interest is defined as having a relationship which would result in a financial or economic loss if the insured dies. A neighbor is not an example of a party that meets this definition.

HIPAA's privacy rules are implemented to: A Protect the privacy of all individually identifiable health information B Protect the applicant from providing evidence of insurability finding data collected on the initial sales appointment C Allow an insurer to obtain investigative, medical, and financial reports to complete the underwriting process D Require all insurers to perform testing for HIV

A HIPAA's privacy rules require insurers to preserve and protect patient confidentiality when obtaining individually identifiable health information.

Buyer's Guide

A generic brochure developed by the NAIC to assist prospective buyers of life insurance. Descriptions of all basic types of life insurance as well as comparative costs of each are included

Cash Accumulation

An amount of cash accessible to the policyowner from within permanent life insurance policies

Which of the following is not a factor in premium determination? A Expenses B Reserves C Mortality D Interest

B Premiums are based on expected mortality, interest, and expenses.

Which of the following is NOT required to sign a completed application? A Applicant B Beneficiary C Producer D Insured or guardian

B The applicant, insured (or guardian if a minor) and the producer's signatures are all required in an application for insurance. The beneficiary is not required to sign the application.

All of the following statements regarding sources of underwriting are correct, except: A The agent's report is confidential between the producer and the insurer B A consumer investigative report may include a credit report C The applicant may be denied coverage based solely on the MIB report D A medical exam may be requested based on the amount of coverage being applied for

C The applicant may not be denied coverage based solely on the MIB report. This report is used as an alert for the insurer to gather additional information and to help detect fraud.

Whose signature is not required on a life insurance application? A Policyowner B Insured C Beneficiary D Producer

C The policyowner has the right to name and change beneficiaries. Beneficiaries do not sign on the application as beneficiaries.

Which of these modes would result in the insured paying the least annual outlay for life insurance? A Semi-annual payroll deduction B Quarterly C Monthly automatic bank draft D Annual

D Paying premiums on an annual basis is always the least costly premium mode. Paying premiums monthly is usually the most expensive mode. Although some insurers may offer a discount for automatic monthly bank drafts, not all do, so this is not an acceptable choice. Payroll deduction is not a "mode."

All of the following are acceptable methods of policy delivery, except: A Registered mail with a signed receipt of delivery B Certified mail with a signed receipt of delivery C Personal delivery with signed receipt of delivery D Delivery to a neighbor with a signed receipt of delivery

D Policy delivery will be accomplished by: personal delivery, with signed receipt of delivery, or registered or certified mail with a signed receipt of delivery, but never being left with a neighbor.

A producer provided a conditional receipt to an applicant on May 5 at the time of an application based on a standard risk. The insurer required a routine medical exam, which was completed on May 15. The policy was issued based on a substandard risk on May 20 and the producer delivered the policy on May 22. The effective date of coverage is: A May 22 B May 15 C May 20 D May 5

D Since the policy was not issued as applied for, coverage is not effective until the producer delivers the policy on May 22 and explains the changes in coverage or increased premium due to a substandard risk. The applicant must accept the counteroffer.

An insurance company must adhere to the __________ when gathering information about an applicant from third parties. A Truth in Underwriting Regulations B Medical Information Bureau Rules C Federal Trade Commission Act (FTCA) D Fair Credit Reporting Act (FCRA)

D The FCRA applies to insurers when gathering information about an applicant from third parties.

The MIB obtains its information from which of the following? A Physicians B Hospitals C Producer's agencies D Insurers

D The primary purpose of the Medical Information Bureau (MIB) is to collect adverse medical information about an applicant's health that is known to insurers to which the applicant has previously applied for coverage.

If a home office underwriter obtains MIB codes inconsistent with information provided on the application, what is the underwriter required to do? A Automatically reject the application and order any premium paid refunded B Refer the case to the state Insurance Department for possible insurance fraud C Issue the policy at a higher premium due to the undisclosed higher risk D Conduct further investigation to obtain more information prior to making a decision

D When the home office underwriter receives MIB codes that are inconsistent with information provided on the application, the underwriter is required to conduct a further investigation to obtain more information prior to making an underwriting decision. Underwriting decisions cannot be based solely on MIB codes since there could be a reasonable explanation for the discrepancy.