Chapter 3: completing the application, underwriting and delivering the policy

Buyer's Guide

- A document that provides generic information about life insurance policies written in language approved by the Department of Insurance. -Explains how a consumer should go about choosing the type and amount of insurance by comparing policies. - Must be provided to all applicants prior to accepting the initial premium

4. all are true of a non medical application

-The agent and the insured complete all of the medical information - It does not require a medical examination - It is usually for a small amount of coverage - require underwriting

Premium Mode

frequency of premium payments

Risk Classification: substandard

poorer than average risk, rated premiums

lab tests and HIV screening

- Insurers must disclose that they are testing for HIV and must obtain written consent from the applicant to test - These tests must be paid for by the insurer

Illustration

- depiction that includes the non guaranteed elements of a policy over a period of years. - must distinguish between guaranteed and projected amounts, clearly state that they are not part of the contract, and identify the values that are not guaranteed as such

2. all must sign application

- proposed insured - policy owner, if different from the insured - agent except - beneficiary does not need too

Delivering policy

1. coverage begins- policy is delivered unless premium is prepaid 2. conditional receipt- begins day of application or day of medical exam whichever is later, IF insured is insurable 3. statement of good health- required if premium is not collected until policy delivery 4. agent responsibilities at policy delivery: explain policy, . provisions, riders, exclusions 5. STOLI and IOLI 6. Replacement 7. USA Patriot Act and SARS

Application process

1. field underwriter: agent solicits the sale 2. disclosure at point of sale: every applicant given written disclosure statement with basic info. about cost and coverage of insurance 3. application; basic source of information used in risk selection process. 1) general info, 2) medical info, 3) agent's report 4. required signatures agent- field underwriter proposed insured- applicant policy owner- different from the proposed insured (3rd party ownership) 5. changes in application: made by applicant only or new application completed 6. consequences of incomplete application- delay processing; incomplete insurer waives right to information if policy issues with incomplete info. 7. warranties and representation: warranty is true statement that is believed to be true to the best of one's knowledge

premium determination primary factors

1. mortality: ratio of number of deaths over certain amount of time versus number of living within specific population --> mortality tables: predict life expectancy and rate of death within a certain group 2. interest: insurers invest premiums, which are paid in advance and then use the interest earned to lower premium rates 3. expense: insurance company operating expenses that are factored into premiums collected from the insured

duties of agents- replacement

1. provide applicant a "Notice regarding replacement" signed by both agent and applicant; leave a copy with applicant. 2. obtain list of all existing policies/annuities being replaced. 3. lease copes fo Notice, all sales proposals or other sales material with the applicant 4. submit a copy of signed Notice to replacing insurer along with the application

underwriting the risk selection process

1. selection of risk (insurability) 2. purpose of underwriting - to protect the insurer against adverse selection 3. primary selection criteria: health, occupation, lifestyle, and hobbies or habits 4. classify risk (preferred, standard, substandard)

Company underwriting:

1. underwriting-risk selection and classification process 2. insurable interest- possibility of financial loss, own life, family members, business partners, key employees, financial obligations/lenders must exist at time of application but not at death 3. reports used by underwriters: CIMMF 4. risk classification: PSS

Suspicious Activity Report (SAR)

A report that must be filed whenever a firm suspects that transactions of $5000 or more may be related to illegal activities

life settlement

Any financial transaction in which the owner of a life insurance policy sells the policy to a third party; requires absolute assignment of all rights from the original policy owner to new owner - usually cash - life expectancy due to medical history and mortality factors

10. when is a producer required to obtain a signed statement of good health?

At delivery if the initial premium was not collected with the application

6. a database maintained by insurance companies to collect and maintain information on applications and claims is called the

Medical Information Bureau

5. if a proposed insured dies before the policy is issues but while in possession of a conditional receipt, the company will

Pay the policy proceeds only if the policy would have been approved as applied for

7. if an insurer requests an HIV test, whose written consent is needed?

The applicant

UW: Field underwriter

agents whose responsibilities are to solicits policy, helps prevent adverse selection, completes application, obtain required signatures, collect initial premium and issues receipt and delivers the policy

9, which mode of payment does not have an additional charge (loading)?

annual

Conservation- replacement

any attempt by existing insurer to dissuade a policy owner from replacing an existing policy or annuity

Policy Replacement

any transaction in which a new life insurance or annuity is purchased and existing policy or annuity will be lapsed or terminated - starts when policy owner receives the policy - request by applicant send comparative information form containing information about proposed policy within 5 working days - free look period for replacement: 10 days new policy - keep copies of replacing and existing insurers must maintain copies of all documents used in replacement for: 3 years

Nonmedical Application

application does not require a medical examination and only a medical questionnaire needs to be completed; usually for small amount of coverage

Risk Classification: standard

average

Risk Classification: Preferred

better than average, lower premium

replacing insurer - replacement

company issues the new policy

existing insurer - replacement

company whose policy is being replaced - notify immediately of receipt of an application for policy replacement and provide copy of notice regarding replacement and information of replacing policy - provide policy owner a policy summary of existing policy within 10 days of receiving notice

Premium Receipts

conditional receipt: used only when premium is collected with the applications, coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, long as the policy is issued as applied for Binding receipt: property insurance; coverage begins immediately for specific length of time even if the applicant is later found to be uninsurable

Reports used by underwriters: Fair credit reporting act (FCRA)

federal law established procedures for reporting agencies to ensure information is confidential, relevant, properly used protects consumers against circulation of inaccurate or obsolete information gives consumer right to know what was in consumer report

Reports used by underwriters: Consumer report

general report on finances, character, work done by independent firm/reporting agency

1. a depiction includes non guaranteed elements of a policy for individual group insurance over period of year is

illustration

3. if a change needs to be made to an application, the correct method would be for the agent to

make the change, have APPLICANT initial it and submit to the insurer

Reports used by underwriters: Medical examinations and Lab Test including HIV

medical examination is needed, at insurer's expense, must disclose use of HIV testing and obtain written consent from applicant

11. the period to receive a full refund for lie insurance or annuity policy issued to a person 60 years of age or old must be at least

new policy 14 days replacement policy 30 days

Reports used by underwriters: medical information bureau (MIB)

nonprofit trade organization funded by member companies collect adverse medical info. from insurers. protect against fraud and holds down insurance costs

Stranger-originated life insurance and investor originated life insurance

policies are purchased with intent of selling them to make a profit, insurable interest does not exist

exclusion - replacement

replacement regulations do not apply to - industrial insurance - credit life insurance - group life insurance - variable life and variable annuities - contractual change is being made to an existing policy with the same insurer - existing policy nonconveritble term with 5 years or less left

USA patriot Act

response to 9/11 terror attack, passed to fight and prevent terrorist activities; requires banks and financial institution (insurers) to establish anti-money laundering standards and report any suspicious activity

Reports used by underwriters: investigative consumer reports

similar but include interviews with friends and associates

8. applicants whose health, habits, or occupations make them higher than normal risks are referred to as

substandard risks