State Insurance Exam Chapter 4

Alexander's life insurance policy is rated. Of the following, who must explain the reason for the premium increase to Alexander? Select one:

(a.) The agent b. The insurer c. The underwriter d. None of the above

The following are risk factors that are considered when underwriting life insurance:

Age Gender Lifestyle Smoking Hobbies Hazardous Occupations Medical History Family Health History Aviation

The sources used to gather information during the underwriting process include:

Application, Medical Report, Attending Physician Statement, Investigative Consumer (inspection) report, Credit report, Medical Information Bureau, Medical examinations and lab tests and Special questionnaires.

Relationship Between Field Underwriting with Underwriting

Both the field underwriting done by the agent and the interpretation of the risk data and selection of the risks performed by the insurance company are parts of the underwriting process. The following chart demonstrates this insurance underwriting process and works to summarize the basic principles outlined in this chapter.

Field underwriting ________ adverse selection. Select one:

a. Increases (b.) Reduces c. Encourages d. Eliminates

The agent must provide the buyer's guide to the applicant: Select one:

a. Upon application b. When the conditional receipt is given to the applicant (c.) When the policy is delivered d. Upon application or at the time of policy delivery if a 10-day free look is provided

Standard risks

are individuals in average physical condition with average lifestyles and habits for people of their respective sex and age group. Standard risks are the average risks of an insurer.

Constructive delivery

occurs when the insurer hands over control of the policy to another person. Constructive delivery occurs when the insurer mails the policy to the agent or other policyholder representative for delivery to the insured. In these cases, a legal delivery has occurred.

Personal delivery

of the policy by the agent in order to obtain a statement of good health from the insured, then legal delivery does not occur until the agent personally delivers the policy to the insured. Possession of the policy by the applicant does not indicate delivery. Sometimes the insurer issues a policy to the applicant to look over.

Traditional net cost method

projects policy premiums for a certain number of years. The cash value and any dividends are subtracted, so the result shows the average premium cost per year. This method does not account for interest.

Other factors that affect health insurance premiums are: Hobbies

Policy benefits Past claims experience Age Gender Occupation Hobbies

Other factors that affect an applicant's underwriting for health insurance include:

Age, Sex, Medical history, Family history, and Hobbies.

Inspection reports

Inspection reports are performed by a credit-reporting agency. Insurers must abide by the rules of the Fair Credit Reporting Act (FCRA).

Investigative reports

Investigative reports are based on interviews with friends and neighbors, employers and coworkers, and other individuals who know the insured. Investigative reports cannot be made unless the insured is notified of the report in writing.

An insurance application has three basic parts:

Part I General Information, Part II Medical Information, and Part III Agent's Report.

Approval receipt

does not begin until the insurer approves the application. Conditional receipts provide coverage only if the applicant is insurable as applied for.

Moral Hazards

An applicant's lifestyle and habits also have an effect on risk selection and classification. A careless or accident-prone person may pose a higher risk to the insurer. Alcohol abuse and drug use are red flags for the insurer.

Part II of the life insurance application includes: Select one:

a. The agent's statement or report (b.) Medical Information c. General Information d. Inspection Statement

Which of the following best describes a life insurance policy in which the proposed insured is not required to undergo a medical examination? Select one:

a. Easy policy b. Simply-issued policy (c.) Simplified issue d. Standard coverage policy

Changes, Errors and Omissions

If an agent notices a minor error on the application, the producer should correct the information in the presence of the applicant and have the applicant initial the change. Changes should be struck through, not erased. If the agent notices a major error on the application, the agent should start a new application for the prospective insured and safely dispose of the previous application. If an agent notices that the application is incomplete, the agent should have the applicant fill in the incomplete sections and then submit the application to the insurer. If the insurer approves an incomplete application, then the insurer has waived its right and is legally estopped from reasserting the right.

Calls are permitted from:

Political organizations, Charities, Telephone surveys, Companies with an established business relationship with the consumer or Companies that have express written consent from the consumer to call.

Insurable interest is a valid concern for the continued life or well being of the insured. Insurable interest exists if:

The applicant is the insured, Is related to the insured by blood or marriage, Is a business partner or Is a creditor of the insured.

Policy Cost Comparison Methods Agents should be aware of two methods used to compare insurance policies. These are the:

Traditional net cost method Interest-adjusted net cost method

A life insurance application can usually be backdated for a maximum of how many months? Select one

a. 3 months (b.) 6 months c. 9 months d. 12 months

Policy Summary

provides specific information about the policy purchased, such as the premium and benefits.

The main purposes of the MIB include:

Preventing misrepresentation and fraud, Providing insurers with tools to assess risk and Holding down the cost of life insurance.

Effective Date of Coverage As explained under conditional receipt, coverage is not effective:

Without collection of the initial premium, Approval of the application, and Policy issuance and delivery.

Telemarketers may call phone numbers not on the Do Not Call List from: Select one

a. 7am to 6pm b. 8am to 5pm (c.) 8am to 9pm d. 9am to 8pm

Insurance agent Margaret receives life insurance applications from Tim and Tom, who are identical twins, and are each applying for the exact same type of policy with the same face amount. The insurance company issues the policies as applied for, but charges Tom a 15% higher premium. Which of the following best explains the higher premium charged to Tom? Select one:

a. Longer free look period b. Insuring clause c. Tom had to undergo a medical examination (d.) Tom's risk classification

All of the following are involved in the collection of an applicant's medical history, EXCEPT: Select one:

a. The application for the insurance policy b. The attending physician statement c. The agent report (d.) The consumer report

All of the following statements are true regarding insurance application procedures, EXCEPT: Select one:

a. The application is one of the key sources of information used by underwriters. b. The producer is responsible for making sure the applicant has filled out the application completely. c. In many states the application becomes part of the insurance contract. (d.) Producers can fill in any missing information they discover on the application.

Backdating

is the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. In most states, applications usually can only be backdated up to six months, and the policyowner must pay all back-due premiums. Backdating does not affect the policy provisions such as the incontestability clause.

Morbidity

is the rate people are expected to become disabled from accident or sickness in a year. Morbidity data helps insurers estimate how many people will become disabled, and the duration of disabilities.

Interest-adjusted net cost method

is used more frequently and is more accurate because it accounts for interest.

Applicant

is the person applying for the policy who fills out the application to be submitted to the insurer.

Physical Condition

An applicant's physical condition is the most important factor in evaluating health risks. The underwriter must know if the applicant has any medical conditions. For example, a person who has chronic headaches and migraines may have a neurological condition that needs medical attention at some point in the future. For example, a person who is extremely underweight or overweight may also pose a higher risk to the insurance company.

When conducting business, a life insurance agent cannot use any of the following titles:

Investment Advisor Financial Planner Financial Consultant

Which of the following is the primary source of information used in underwriting an insurance policy? Select one:

a. Attending physician statement (b.) Application c. Agent report d. Medical Information Bureau

Declined risks

are uninsurable. These individuals are too risky for an insurer, and are declined coverage.

Agents should:

-Determine whether the applicant understands the questions asked on the application, -Verify if the statements given are being misrepresented and -Verify if any information has been concealed. These actions will keep from delaying issuance and delivery of a policy.

The most important factors in underwriting a health insurance policy are:

Physical condition, Moral hazards, and Occupation.

Preferred risks

are individuals who are above average in terms of physical condition and lifestyle and present a less than average risk to the insurer. These risks have lower premiums than standard risks. In life insurance, these are healthy non-smoking individuals with long life expectancies.

Underwriters seek to answer two big questions when deciding whether to issue an insurance policy:

-Is the applicant insurable? -Does the applicant have an insurable interest in the insured?

Occupation

An applicant's occupation is important for predicting the likelihood and severity of a disability. Some occupations, such as office jobs, pose little threat for disability. While others, such as construction workers, factory workers and mine workers expose people to a wide array of hazards - chemicals, heavy machinery, or precarious work conditions.

Rejected Business Rule

If an agent turns in an application to his/her standard company and the company declines to issue the policy standard, the rejected business rule allows the agent to then go to another company to issue the policy. The agent does not need to be appointed by the second company in order to the get the policy issued for his or her client and can also be paid a commission.

Anti-Money Laundering (AML) and the PATRIOT Act

Money laundering is a process of concealing the origin of money obtained through illegal activities, such as drug trafficking or other crime. Money launderers make multiple financial transactions, placing the illegal funds into legitimate financial institutions and businesses to "wash" any evidence of its original source. Money laundering is a federal crime with up to 15 years imprisonment and fines and penalties. After the September 11th terrorist attacks, the PATRIOT Act was signed into law. The PATRIOT Act allows the government to obtain certain records to prevent terrorism, as well as prevent money laundering.

Do Not Call List

The Federal Trade Commission (FTC) administers the National Do Not Call List. The purpose of the Do Not Call List is to allow consumers to place a limit on the number of personal telemarketing phone calls they receive. Consumers may place their phone numbers on the Do Not Call List at www.donotcall.gov or by calling toll-free 1.888.382.1222.

Premium Collection

Typically, the initial premium accompanies the application submittal. If not, the applicant has made an invitation to offer, and the premium must be collected when the policy is delivered. After the initial premium, subsequent premiums are payable in advance. The premium must be collected at delivery.

Consumer Reports Consumer reports provide information about the applicant's:

-Character, -Lifestyle, and -Financial stability. Consumer reports are generally only used for policies with large coverage amounts because the reports increase underwriting expenses. There are two types of consumer reports: Inspection reports and Investigative reports

Medical Examinations and Lab Tests

Insurers pay the cost of medical examinations Medical examinations are more often required for life insurance policies, but some health insurance policies may also require a medical examination. A life insurance policy that does not require a medical examination is referred to as "simplified issue life insurance" or "non-medical application." A medical examination may be required for whole and term life policies, especially those with higher face amounts. Medical exams may be required because an applicant's health affects his life expectancy, and consequently the underwriting of a life insurance policy. Insurers pay the cost of medical examinations.

Signatures

The agent and the applicant are required to sign the application. If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application (in some states once a minor reaches the age of 15, the minor is eligible to contract for a life or health insurance policy). It is important for the agent to be present to witness any and all signatures. Both the agent and the applicant must sign disclosure forms and additional questionnaires that the applicant must complete. If automatic checking account drafts will be used for premium payment, the applicant must sign agreeing to such.

Rates for insurance policies are based on: Select one:

a. Marital status and age b. Sex, age and marital status (c.) Sex and age d. Sex only

If required by the insurer, the statement of good health must be collected by the producer at the time of: Select one:

a. Policy application b. Policy issuance (c.) Policy delivery d. None of the above

Which of the following best describes the process used to select and classify risks? Select one:

a. Rating b. Discrimination c. Risk classification (d.) Underwriting

In Ray's application for life insurance an applicant failed to complete one part regarding family history. In his statement, the agent described the family as long-lived and healthy. If an insurance company accepts the application in the incomplete form and the applicant for coverage dies young from a cardiac condition that had taken the lives of both his parents before age 50, will the company deny or accept the claim of the beneficiaries? Select one:

a. It will deny the claim, based on misrepresentation. b. It will deny the claim, based on concealment. c. It will deny the claim, based on breach of warranty. (d.) It will pay the claim, because in accepting the application, it waived its right to the missing information.

Who administers the National Do Not Call Registry? Select one:

a. The Social Security Administration b. The state insurance department (c.) The Federal Trade Commission d. The Department of Defense

Which of the following does not demonstrate constructive delivery? Select one:

a. The agent mails the policy to the insured b. The insurer mails the policy to the agent, who in turn, mails the policy to the insured (c.) A conditional receipt is issued to the applicant d. The insurer mails the policy to the insured

If a company issues a conditional receipt to an applicant who has paid an initial premium for a policy that does not require a medical examination: Select one:

a. The company thereby divests itself of all risk. (b.) The applicant is immediately covered. c. The applicant must yet meet certain conditions before their application can be submitted to the company. d. The company thereby waives its right to refuse to issue a policy.

Statement of Good Health

The insurer may require a statement of good health that verifies that the insured has not become ill, injured or disabled during the policy approval process (the time between the application and delivery of the policy), or if the applicant did not submit the initial premium with the application. Unless otherwise directed by the insurer, the agent should not deliver the policy if the insured's health has worsened. In this case, the agent should notify the insurer and proceed with the insurer's instructions.

At what age may a minor purchase a life or health insurance contract? Select one:

(a.) 15 b. 16 c. 18 d. 21

Which of the following best describes the MIB? Select one:

(a.) Nonprofit trade organization that supplies insurability information to member companies b. Government agency that collects information about individuals' life and health insurance policies c. State organization that catalogs individuals' life and health insurance claims d. Group of federally-appointed physicians that monitor the medical treatments received by individuals insured by private companies

Coverage is effective: Select one:

(a.) With collection of the initial premium, approval of the application, policy issuance and delivery b. Upon collection of the application only c. Upon collection of the initial premium only d. When the applicant makes an offer to the insurer

An individual signed an application for a $100,000 life insurance policy and paid the first premium on January 1. The agent issued an insurability receipt. A week later, the required medical examination proves the person insurable. If the person dies before the insurer approves the application: Select one:

(a.) The coverage will be retroactively effective. b. The coverage will be retroactively effective, but the policy will only pay $50,000. c. No coverage will be provided. d. No coverage will be provided, but the premium will be refunded.

Classification of Risks Underwriters at the insurer's home office classify risks by analyzing applicants':

-Medical history, -Hobbies, -Occupation, and -Character. The following rating classification system is used to categorize the favorability of a given risk: Preferred, Standard, Substandard, and Declined. Lower risks tend to have lower premiums, and higher risk tend to have higher premiums.

Health Insurance Premium Factors Health insurance premiums are based on three factors:

-Morbidity (rate of accident or sickness), -Interest, and -Expenses.

Medical Report and Attending Physician Statement (APS)

A medical report is sometimes used for underwriting policies with higher face amounts. If the information in the medical section warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS). The attending physician statement is the report from the applicant's physician or other qualified medical examiner, such as a paramedic or nurse, who completes the applicant's medical examination as requested by the insurer. Once the medical report is completed, it is sent to the insurer for use in underwriting.

Insurance companies classify occupations into five classes:

AAA, AA, A, B, and C The AAA class is for professional workers and those who work in an office. The lower classes (B and C) are for more hazardous occupations. The premium for health insurance policies is directly affected by an occupation's degree of hazard. Applicants with less hazardous occupations have lower premiums. Applicants with more hazardous occupations have higher premiums.

Interest

In health insurance, premiums are paid in advance before a claim is made. These premiums are invested to earn interest. Higher interest rates allow insurers to charge lower premiums.

The Medical Information Bureau

is a nonprofit trade organization that maintains medical information about individuals that is used by life and health insurers.

Premium payment mode

is the frequency that premium payments are made. Some life insurance policies allow policyholders to pay one large single premium payment. This greatly reduces the costs of administering the policy since the insurer only needs to process one payment. Annual Premium = Cheapest Monthly Premium = Most Costly

Application

is the primary source of insurability information used in underwriting. The person who applies for coverage must complete and submit the application. In most cases, the application is attached to, and becomes part of, the contract. If the application is attached to the contract and the insurer discovers intentional misstatements, it can be used as a legal document. Agents should do their best to review the applicant's answers to questions on the application to avoid delays in underwriting from inaccuracies.

Binding receipt (binder) or the temporary insurance agreement

provides coverage from the date of the application, regardless of whether the applicant is insurable. Coverage usually lasts for 60 days, or until the insurer accepts or declines the coverage. In addition, coverage usually has a maximum of $1,000,000. Binding receipts are rarely used in life insurance, and are primarily used in auto and homeowner's insurance.

After delivering the policy, agents/insurers should keep in good communication with the client. This assures high retention rates.

-Agents should ensure their clients are satisfied with their purchase. -High retention rates are advantageous for agents because it assures renewal business (renewal commissions). -An advantage of high retention rates for policyholders is peace of mind, knowing they have suitable coverage at competitive prices. -Insurers benefit from high retention rates because it is continued business income.

Once the underwriter establishes that an applicant is insurable, the underwriting process begins. The underwriter will:

-Evaluate information about the applicant and -Select a risk classification and premium rate that matches the degree of risk undertaken. After the application clears underwriting, the insurer will issue the policy for delivery, and the insurance producer will deliver the policy to the policyowner.

This employee of the insurer assigns risk categories to applicants: Select one:

a. Broker b. Agent (c.) Underwriter d. Actuary

Selection Criteria and Unfair Discrimination

Insurers are in the business of selecting good risks that will not jeopardize the financial stability of the company. Insurers use discrimination to determine good risks. However, insurers cannot unfairly discriminate against individuals who are part of the same risk class and have the same life expectancy in any policy condition or coverage. If an underwriter determines that the risk does not meet the criteria for at least standard issue, the company may: -Choose to decline to accept the risk, -Issue the policy with an exclusion rider, or -Issue the policy with a higher than standard premium. Unfair discrimination includes discrimination against the blind and the physically or mentally impaired, or based on sexual orientation.

Policyowner

(synonymous with policyholder) is the person who has all ownership rights under the policy (such as assignment and naming beneficiaries), pays premiums and accepts the policy when delivered. In most cases, the policyowner is the applicant.

Expenses Insurers' expenses are called loading. These are the daily expenses of operating an insurance company. Loading includes the following costs:

-Acquisition Costs: cost of effectuating insurance policies, of which a producer's first year commission makes up the greatest portion -Overhead: insurer's salaried staff, rent, and furniture -Contingency Funds: additional premium may be required if original premium is insufficient - only some insurers (i.e., assessment insurers) have the right to charge additional premium --Immediate Claims Payments: insurers assume that all claims are paid at the end of the year when establishing rates, when in reality claims are paid all year

Premiums and Receipts

Agents should make every effort to collect the initial premium with the application. This speeds up the policy application process and improves the likelihood the policy will be accepted by the applicant upon issuance. The agent issues the applicant a premium receipt upon collecting the initial premium. There are two types of premium receipts that determine when coverage will begin: Conditional receipts and Binding receipts.

HIV and AIDS

Each state has its own laws regarding HIV testing. However, most states allow insurers to include a question on the application asking if the applicant has tested positive for AIDS. Insurers are also permitted to request applicants undergo an HIV test as part of the application requirements, at the insurer's expense. Insurers cannot target a population based on sexual orientation, marital status or geographic location as the basis for an HIV test

The FCRA requires the applicant be notified:

In writing if a credit report will be used and If the premium is increased because of a credit rating.

Underwriting is the process that insurance companies use to:

Select, Classify, and Rate risks. Insurance companies use the underwriting process to prevent adverse selection, which could cause the insurance company to become insolvent. Underwriting is used to classify risks and assign premium rates that accurately reflect the amount of risk undertaken by the insurance company. While the selection, rating, and classifying of risks are part of the underwriting process; the notification of risks is NOT part of the underwriting process. Underwriting is the process that insurance companies use to select, classify, and rate risks. The insurance company assigns a premium based on the risk.

The PATRIOT Act expands the definition of "money laundering" to include:

Violent crimes, Bribery of public officials, Fraudulent use of public funds, Smuggling, The illegal export or import of guns, ammunition, and other weapons not authorized in the U.S., and Computer crimes.

Which of the following statements about a temporary insurance agreement is CORRECT? Select one:

a. Coverage begins when the application is signed and the premium is paid, assuming any required medical exam is scheduled within three days. (b.) It provides temporary coverage until an application is rejected or the policy is issued. c. It provides protection against death by accident, but not death from natural causes. d. It provides term insurance protection until the policy is converted to permanent insurance.

Gerald has a chronic medical condition. What will his risk classification be? How will his premium be affected? Select one:

a. Gerald's risk classification will be preferred. His premium will be higher. b. Gerald's risk classification will be standard. His premium will be lower. (c.) Gerald's risk classification will be substandard. His premium will be higher. d. Gerald will be denied coverage.

Credit Report

An applicant's credit history is sometimes used for underwriting. The Fair Credit Reporting Act (FCRA) requires the applicant be notified at the time of application that a credit report may be requested, regardless if a credit report will be requested or not. Consumers must also be informed that they have the right to request additional information about the report, such as the name of the company that provided the report. Such additional information must be provided to consumers within five days, if requested. Note, however, that the insurance company cannot tell the client what was in the report or why the client has been denied.

Conditional Receipt

The agent issues a conditional receipt to the applicant after the application and premium have been collected. If the insurer accepts the policy as applied for, the coverage will take effect from the date of the application or medical exam, whichever is later. There are two types of conditional receipts: Insurability and Approval.

Substandard risks

are termed extra risks or rated risks because they pose a higher risk to the insurer than standard risks. This rating may be due to the applicant's: Physical condition, Disease history, Hazardous occupation, Dangerous hobbies or Habits. A stunt pilot or a chain smoker would be considered substandard risks. Substandard risks pay higher premiums because their life expectancy is shorter. Also an insurer might issue the policy with exclusion.

Special Questionnaires

are used for applicants involved in special circumstances, such as: Aviation, Military service, Hazardous occupations or Hobbies. The questionnaire provides details on how much of the applicant's time is spent in these activities. Individuals who indicate on their life insurance application that they are commercial or private pilots will be asked to complete an aviation questionnaire. The purpose of the questionnaire is to provide the insurer with information regarding the individual's piloting schedule and FAA ratings before making a decision on what policy restrictions to apply.

Beneficiary

is the named person or persons who receive policy benefits. Beneficiaries can be primary or contingent. Primary beneficiaries are first to receive any benefit payouts, while contingent beneficiaries are beneficiaries that receive benefits in the event the primary beneficiary is unable to do so (i.e. had predeceased the insured).

Loss ratio

is the proportion of losses incurred by an insurer with respect to the total dollar value of premiums received (total losses divided by total premiums). Expense ratio is the insurer's expenses divided by the total premiums received. If the sum of an insurer's loss and expense ratio is: -100%, then the insurer has broken-even. -Greater than 100%, the insurer has a loss. -Less than 100%, the insurer has a gain. Underwriters keenly analyze loss ratios to determine the renewability of insurance contracts and the adequacy of premiums. Loss Ratio = Losses/Premiums Expense Ratio = Expenses/Premiums

Third party ownership

is when a person other than the insured applies for a policy. This frequently occurs when a person applies for a policy for a family member or as part of a business or debt agreement. If the applicant is not the insured, the agent must verify that the applicant has an insurable interest in the insured.

Buyers Guide

provides general information about the types of life insurance policies available, in language that can be understood by the average person.

Insurability receipt

provides interim coverage as long as the applicant is insurable. However, most conditional receipts are approval conditional receipts.