Life Insurance Exam Chp 1
Elements of Legal Contract
4 essential aspects: 1: Agreement (offer and acceptance) 2: Consideration 3: Competent Parties 4:Legal Parties
Buyer's Guide
A booklet that describes insurance policies and concepts, and provides general information to help an applicant make an informed decision. MUST PROVIDE before first premium paid. If policy contains unconditional refund provision of at least 10 days (free-look period), guide can be delivered with policy.
Stock Company Insurer
Stockholders provide capital to share in profits and loss, officers elected by stockholders and manage insurance companies. Typically non-participating policy, meaning policyowners do not share in profits or losses. Also do not pay dividends to policy holders, but do pay to stockholders
USA Patriot Act (2001)
Strengthens the federal government's power to conduct surveillance, perform searches, and detain individuals in order to combat terrorism. Established Financial Crime Enforcement Network (FinCEN) which required banks, brokers, and other financial institutions to enable ANTI-MONEY LAUNDERING (AML) standards.
Stranger-oriented Life Insurance
A life insurance arrangement in which a person with no relationship to insured purchases a life policy on insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies. Financed and purchased with sole intent of selling them for life settlements These violate the PRINCIPLE OF INSRUABLE INTEREST. Insures take aggressive legal stance against suspected STOLI purchases. Lawful Life Settlements do not constitute as STOLI because you are selling an existing life insurance policy.
Field Underwriter
A life insurance producer of the company. The agent who solicited the potential insured. Has many responsibilities, such as: Proper solicitation, helping prevent adverse selection, completing the app, obtaining required sigs, collecting the initial premium and issuing receipt if applicable, and delivering policy.
Medical Information Bureau (MIB)
A membership corp owned by member insurance companies. It is NONPROFIT TRADE ORGANIZATION that receives medical info from insurance companies and maintains confidential medical impairment info on individuals. Its a systematic method for companies to compare info on potential insured with other info insurers may have discovered. Can only be used as aid in helping insurers know what areas of impairment they might need to investigate further INSURERS CANNOT REFUSE COVERAGE SOLEY ON BASIS OF ADVERSE INFO ON MIB REPORT
Fair Credit Report Consequences
A person who knowingly and willingly obtains info on consumer under false pretense may be fined and subject to 2 years in prison. Unknowingly violating FCR is liable in amount equal to loss to consumer, and any reasonable attorney fees. Individual willingly violating the act enough to constitute a general pattern or business practice faces penalty up to 2500.
Illustration
A presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years. MUST DO THE FOLLOWING: Distinguish b/w guaranteed and projected amounts, clearly state that an illustration is not a part of contract, and identify those values that are not guaranteed as such. Can only use if illustrations have been approved and are not changed in any way.
Collecting Initial Premium and Issuing Receipt
A producer should attempt to collect the initial premium and submit it along with the application to the insurer, because the policy will not go into effect until the first premium has been paid. Agents must issue PREMIUM RECEIPT whenever premium is collected.
Preferred Risk
A risk whose physical condition, occupation, mode of living and other characteristics indicate a prospect for longevity for unimpaired lives of the same age.
What is Insurance?
A transfer of of risk of loss
Fair Credit Reporting Act
Act that protects privacy of background information and ensures that information supplied is accurate, relevant and properly used. Also PROTECTS CONSUMERS against circulation of inaccurate or obsolete personal or financial information. Consumer Reports and Investigative Consumer Reports can only be used by someone with legitimate business purpose (Insurance underwriting, employment screening, and credit transactions)
Consequences of Incomplete Applications
All questions must be answered on application. If incomplete, insurer must return application for completion. If policy issued without all answers, contract interpreted as if the insurer waived its right to have a question answerer. Insurer may not have right to deny coverage based on any info missing.
Warranty
An absolutely true statement upon which validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of premium. Statements made by applicants for life and health insurance policies are typically not considered warranties, except in cases of fraud.
Contract
An agreement between 2 parties enforceable by law
Standard Risk
An applicant or insured who is considered to have an average probability of a loss based on health, vocation and lifestyle compared to majority of people at same age.
Investor-Owned Life Insurance
Another name for STOLI, where a third-party INVESTOR WHO HAS NO INSURABLE INTEREST IN THE INSURED intitates a transaction designed to transfer the policy ownership rights to someone with no insurable interest in the insured and who hopes to make a profit upon death of insured.
Suspicious Activity Reports (SAR) Rules
Any company with AML Program subject to SAR rules. Deposits, withdrawals, transfers or any other business deals involving $5000 or more are req to be reported if suspected that deal(s): Has no business or lawful purpose, designed to misstate other reporting constraints, uses the financial institution or insure to assist in criminal activity, is obtained using fraudulent funds from illegal activities, or is intended to mask funds from other illegal activities. Relevant SAR reports MUST BE FILLED with FinCEN within 30 days of discovery.
Declined Risks
Applicants who are rejected. Risk may be declined due to: No insurable interest, applicant is medically unacceptable, potential for loss is so great that it does not meet definition of insurance, and insurance is prohibited by public policy or is illegal.
Anti-Money Laundering Requirements
Assimilate policies, procedures and internal controls based on an in-house risk assessment (File suspicious activity reports with feds). Appoint a qualified compliance officer responsible for administering the AML program. Continual training for applicable employees, producers and others. Allow for independent testing of the program on a regular basis.
Required Signatures
Both the agent and proposed insured (applicant) must sign. If policyowner and insured are different (business insurance for employees) both parties must sign. Exception for parent applying for insurance for child.
Part 2: Medical Information
Contains info on medical background, present health, previous medical visits, medical status of living relatives, causes of death of relatives. Nonmedical application if insurance is small, but larger amounts require examination by professional. It is agent's responsibility to make sure application is filled out accurately and to best of insured's ability, and too watch for misleading/fraudulent info.
Red Flags related to SARs
Customer uses fake ID or cancels transaction after learning ID is needed, Two or more customers use similar IDs, Customer conducts transactions just under reporting reqs, Two or more customers seem to be working together to break Bank Secrecy Act reqs, or Customer uses two more more money service business to break one transaction into smaller ones.
Use and Disclosure of Insurance Information
Every applicant for a life insurance policy must be given a written disclosure statement that provides basic information about the cost and coverage of the insurance being solicited. Helps ensure educated and informed choice of insurance. Applicant must be provided Disclosure Authorization Notice when info is used by insurer. It states practice and use of info. Must be written in plain language and approved by head of the Department of Insurance
Certificate of Authority
Grants Insurer permission to do business in a state. Must meet financial reqs set by state then are considered AUTHORIZED/ADMITTED.
HIPPA
Health Insurance Portability and Accountability Act, a federal law that protects health info. Provide protection for the privacy of certain individually identifiable health info (such as demographic data relating to physical or mental health condition, or payment info that can identify the individual), referred to as PROTECTED HEALTH INFO. Privacy rule allows patients to access own medical record and know who has seen records in past 6 years. But, rule allows DISCLOSURES WITHOUT AUTHORIZATION TO PUBLIC HEALTH AUTHORITIES, authorized by law to collect or receive info for purpose of preventing or controlling disease, injury, or disability.
Risk Classification
Home Office underwriting department looks at applicant's past medical history, present physical condition, occupation, habits and morals. If acceptable, underwriter determines RISK or RATING CLASSIFCATION to decide cost of premium. Three Classification: Standard. Substandard or Preferred
When Coverage Begins
If no premium paid with application, agent collects with delivery of policy, THEN coverage begins. Statement of good health may be required to make sure no injury has occurred since application date. If full premium paid with application and policy goes through, coverage begins date application was submitted assuming no medical exam is required.
More Fair Credit Report Guidelines
If policy declined due to consumer/investigative report, consumer must be advised and provided with name and address of reporting agency. CONSUMER HAS RIGHT TO KNOW WHAT IS IN REPORT. Right to know anyone who received report in past year. If report challenged, agency has to investigate if warranted. If found inaccurate, agency must send accurate report to all parties it sent to in past 2 years. Consumer reports cannot contain certain info if report in connection with life insurance policy or credit transaction of less than 150k. PROHIBITED INFO includes bankruptcies more than 10 years old, civil suits, records of arrest or convictions of crimes, or any other negative info that is more than 7 years old. NEGATIVE INFO means delinquencies, late payments, insolvency or any other form of default.
Offer and Acceptance
Must be definite offer by one party, and other party must accept terms. Applicant makes OFFER, Insurance underwriter ACCEPTS
Part 1: General Information
Includes general info such as name, age, DOB, address, gender, income, marital status, and occupation. Also includes current policy and info on amount of coverage, and info on beneficiary
Consumer Reports
Includes written and/or oral information regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports and other public sources.
Sources of underwriting Information
Info obtained from Application, Agent's Report, Investigative Consumer Report (Inspection), Fair Credit Reporting Act, Consumer Reports, Medical Information Bureau (MIB), Medical Examinations, HIPAA
Aleatory Contract
Insurance contract are Aleatory, meaning exchange of unequal amounts or values
Domicile of Insurer
Insurers identified by their location of incorporation and whether they are allowed to write in a state. Domestic=business in same state Foreign=Business in diff state Alien=Insurer outside of US
Medical Examinations
May be requested when higher amounts of coverage involved or if health is in question. 2 types of report: Paramedical and Attending Physician's Statement Paramedical: Completed by paramedic or a registered nurse Attending Physician's Statement (APS): Completed by medical practitioner who treated applicant for a prior medical problem.
Conditional Receipt
Most common type of receipt, used when applicant submits prepaid application. Says "Coverage will be EFFECTIVE either on the date of application or date of medical exam, whichever occurs last," as long as applicant is found to be insurable at standard risk. Rule does not apply if policy is declined, rated, or issued with riders excluding specific coverages.
Delivering the Policy
Once underwriting process is complete, agent delivers policy to insured. Personal delivery is best, but can be mailed. Advisable to obtain Delivery Receipt
Unilateral Contract
Only one of the parties is legally bound to do anything. Insured makes no legally binding promises. But insurer is legally bound to pay losses covered by a policy in force.
Mutual Companies
Owned by policy owners and issue PARTICIPATING policies, so policyowners entitled to dividends which are NONTAXABLE. Dividends not guaranteed, but generated when premiums and earnings combined exceed the actual costs of providing coverage.
Competent Parties
Parties to a contract must be capable in eyes of law; both parties of age, mentally competent to understand contract, and not under influence of drugs or alcohol.
Explaining Policy and its Provisions, Rides, Exclusions, and Ratings
Personal delivery allows agent to make sure the insured understands all aspects of the contract. They can review, point out provisions or riders that may be different than anticipated, and explain their effect. Also explain the rating procedure, especially if it was RATED DIFFERENTLY than expected. Should also explain other choices and provisions available to policyowner.
Contract of Adhesion
Prepared by one of parties (Insurer) and accepted or rejected by other (Insured). Insurance policies not drawn up through negotiations, but by take it or leave it basis. Any ambiguities in the contract will be settled in favor of the insured.
Agent's (Producer's) Report
Provides the agent's personal observations concerning the proposed insured. The insurer may ask for adverse info about the applicant, or their opinion on applicant's character, financial standing, environment, etc. Not included in contract, but part of application process.
Legal Purpose
Purpose of contract must be legal and not against public policy. For Life Insurance Contract, must have Insurable Interest and Consent. Contract without legal purpose is void and not enforceable.
Conditional contract
Requires certain conditions be met by policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations.
Insurance Transaction is also called?
Solicitation, Negotiations, Sale, and Advising an individual concerning coverage or claims
Application
Starting point and basic source of info for insurance company. Not uniform and can vary from provider, but generally consist of Part 1: General Info and Part 2: Medical Info
Representations
Statements BELIEVED to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.
Consideration
The binding force of contract; something of value that each party gives to the other. Insurer's Consideration is promise to pay for losses Insured's Consideration is payment of premium and statements on application
Replacement
The practice of termination an existing policy or letting it lapse, and obtaining a new one. Special underwriting procedures must be taken to insure new policy is appropriate for PO.
Underwriting
The risk selection process. Underwriter's responsibility include selecting only those risks that are considered insurable and meet the insurer's underwriting standards. Purpose is to protect the insurer against ADVERSE SELECTION (risks more likely to suffer a loss). Specific underwriting reqs differ by insurers
Investigative Consumer Report (Inspection)
Underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral information. They are general reports of the applicant's finances, character, work, hobbies, and habits. These companies are subject to the rules and regulations outlined in the Fair Credit Reporting Act Main difference from Consumer Reports is that ICRs obtain info through associates, friends, and neighbors. Consumer must be told about report within 3 DAYS. If consumer wants more info about report, Agecy must provide within 5 days of request.
Misrepresentations
Untrue statements on application which could void contract. Material misreps could alter underwriting decision. If intentional, it is considered fraud.
Changes In Application
When an answer must be changed on application, agents have the option (depending on insurer) to change the info themselves with applicant's initials or by issuing new application. An Agent SHOULD NEVER white out or erase information.
Medical Examinations Guidelines
When required by insurer, it must be payed for by insurer. More common for life insurance policies. Also common to issue HIV test when applying for large coverage. Specific regulations for HIV testing include: Insurer must DISCLOSE THE USE OF TESTING TO THE APPLICANT, and OBTAIN WRITTEN CONSENT from the applicant on the approved form Insurer must ESTABLISH WRITTEN POLICIES AND PROCEDURES for the internal dissemination of test results among its producers and employees to ensure confidentiality.
Insurable Interest
When the policyowner faces the possibility of losing money or something of value. MUST EXIST AT TIME OF APPLICATION. Once policy has been issued, issuer must pay benefit even if there is no longer insurable interest. Valid insurbale interest when policy is insuring: Policyowner's own life, life of family member, or life of business partner, key employee, or someone with financial obligation to policyowner. Insurable Interest not required of the beneficiary.
Policy Summary
a written statement describing the features and elements of the policy being issued. Includes: Name and address of agent, full name and home office of or admin office of insurer, and generic name of policy and each rider. Also includes premium, cash value, dividend, surrender value and death benefit. Can be delivered with policy
Substandard (High Exposure Risk)
applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are referred to as "Rated" because they could be issued with the PREMIUM RATED-UP, resulting in higher premium.
