Chapter 7: Life Insurance Underwriting and Policy Issue

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.

Constructive Delivery

A symbolic delivery of property that cannot be physically delivered.

USA Patriot Act

Act that gives federal officials greater authority to take measures to combat terrorism.

Standard Risk

Classification of risk that is normal

Conditional Receipt

The most common type of premium receipt is the conditional receipt. The conditional recipient 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 of the application was signed or the date of the medical exam.

Part III - Agent's Report

This is where the agent reports personal observations about the proposed insured. In Part III, the agent provides additional information about the applicants financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant. The agents report also usually asks if the proposed insured will replace an existing policy.

Part II - Medical

Part II focuses on the proposed insured's health and asks a number of questions about the health history (about the proposed insured and the proposed insureds family too). Must be completed in its entirely for every application. The individual to be insured may be required to take a medical exam and or provide a blood test or urine specimen and physical exams.

Preferred Risk

An insurance classification for applicants who have a lower expectation of incurring loss, and who, therefore, are covered at a reduced rate. ex, low risks such as not smoking, weight within ideal range and not drinking.

Substandard Risk

An applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium.

Medical Information Bureau

An organization that stores information from insurance companies and makes it available to other companies during the underwriting process. Its purpose is to help prevent fraud and concealment by insurance applicants. Results may be realized to the proposed insureds physician.

Explaining the Policy and Ratings to Clients

Most applicants will not remember everything they should about their policies after they have signed the application. This is another reason agents should deliver polices in person. Only by personally delivering a policy does the agent have a timely opportunity to review the contract and it's provisions, exclusions and riders.

Applicant Ratings

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

Policy Effective Date

it identifies when the coverage is effective, but also it establishes the date by which future annual premiums must be paid. The policy will not be truly effective until it is delivered to the applicant, the first premium is paid, and a statement of continued good health is obtained. The date of the receipt will generally be noted as the policy effective date in the contract (if a premium deposit is given)

Policy Issue and Delivery

Explaining the policy and how it meets the policy's owners specific objectives helps avert misunderstandings, policy returns and potentially lapses.

Special Questionnaires

Forms used when, for underwriting purposes, the insurer needs more detailed information from an applicant regarding aviation or avocation, foreign residence, finances, military service, or occupation. The most common of these special questionnaires is the aviation questionnaire required of any applicant who spends a significant amount of flying.

Proper Solicitation

High professional standards that require an agent to identify himself properly as an agent soliciting insurance on behalf of an insurance company. As in many states, an agent is required to deliver the applicant a Life Insurance Buyer's Guide and a Policy Summary. These documents are usually delivered before the agent accepts the applicants initial premium.

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. Recall that one of the requirements for a valid contract is consideration. In the case of an insurance contract, the consideration is the first premium payment plus the application. An insurer will not allow an applicant to posses a policy without receipt of the initial premium.

Inspection Reports

Inspection reports usually are obtained by insurance companies on applicants who apply for large amounts of life and health insurances. The purpose of these reports is to provide a picture of an applicants general character and reputation, mode of living, finances, and any exposure to abnormal hazards. Investigators and 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 the copy of the report. An insurer's obligation involving the disclosure of an insured's non public 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 is permitted to do so under the fair credit reporting act.

Obtaining a Statement of Insured's 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 Medical Report

For larger policies a medical report may be required to provide further underwriting information. If the applications Medical section raises questions specific to a particular medical condition, the underwriter may also request an attending physicians statement (APS) from the physician who has treated the applicant. An insurer's request for an attending physicians report must be accompanied by a copy of the signed authorization. The statement will provide details about the medical condition in question. Medical reports must be completed by a qualified person, but that person does not necessarily have to be a physician. Many companies accept reports that are completed by a paramedic, or a registered nurse. When completed the medical report is forwarded to the insurance company, where it is reviewed by the company's medical director or a designated associate.

Part I - The General

Part I of the application asks general questions about the proposed insured, including name, age, address, birth date, sex, Income, marital status, and occupation. Details about requested insurance coverage are also included in Part I such as: 1. Type of policy 2. Amount of Insurance 3. Name and Relationship of the beneficiary 4. Other insurance the proposed insured owns 5. Additional insurance applications the insured has pending Other information sought may indicate possible exposure to a hazardous hobby, foreign travel, aviation activity, or military service, smoking status.

Purpose of Underwriting

To protect the insurer against adverse selection, each insurer sets its own standards as to what constitutes an insurable risk versus an insurable risk just as each insurer determines the premium rates it will charge it's policy's owners. Individuals are generally presumed to have an unlimited insurable interest in themselves.

Credit Reports

reports provided by credit bureaus to document a person's credit payment history. Applicants with poor credit ratings standings are likely to allow their policies to lapse within a short time, perhaps even before a second premium is paid. Home office will refuse those with poor credit ratings or those applying for life insurance policies they reasonably can't afford.

Changes in the Application

The application for insurance must be completed accurately, honestly and throughly, and it must be signed by the insured and witnessed. 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.

Warranties

Statements that are guaranteed to be true and are part of the legal contract. Breach of warranty is grounds for voiding an insurance contract. Each application requires the signatures of the purpose adult insured, the policy owner (if different from the insured) and the agent the solicits the application. The applicants signature is required on a life insurance application

Completing the Application

An insurance company will return the application to the agent if the agent submits an incomplete application. The applicants statements are considered representations. Representations are statements an applicant makes as being substantially true to the best of the applicants knowledge and belief.

Fair Credit Reporting Act

Federal law that applies to financial institutions that request these types of consumer reports. Insurance companies fall under this category

The Application

The application for insurance is the basic source of insurability information. There are three basic parts to a typical life insurance application: Part I - General, Part II - Medical, and Part III - Agent's Report.

Backdating

The purpose of backdating a life insurance policy is to use premiums based on a earlier age. (If an applicant can be treated by the insurance company as being a year younger, the result can be a lifetime of slightly lower premiums). Many insurers are willing to let an applicant backdate (or "save age") a policy. Once issued, the insurance contract is sent to the sales agent for delivery to the applicant.